Chinese stock market crash 2015: Money has poured into Japan as Asian markets crumble over China woes

Money has flowed into Japanese exchange traded funds (ETFs) this year as the market stands out as the last area of safety in Asia. 

 

So far this year, overseas investors have piled $16.4bn into ETFs tracking Japan’s stock markets – nearly quadruple last year’s total of $4.4bn, according to data from Markit.

 

The Nikkei 500 is up over 20 per cent over the last year, despite taking a hit of nearly 12 per cent as panic  over China spreads across Asian markets. 

 

This is in stark contrast to the amount of money that has been pulled from Asia equities this year. Yesterday was dubbed “Black Monday” by the Chinese government, as the country’s main market, the Shanghai Composite, gave up all its gains for the year. 

 

Worries about China’s stock market, currency and economy have spread, and the Shanghai Composite is down 35 per cent since its peak in mid-June. 

 

So far, Chinese efforts to stimulate the stock market have failed. The situation looks increasingly desperate as authorities have implemented measures such as banning short selling and stock sales by large shareholders – regulations which in other markets would seem heavy-handed.

 

Fear has pushed other Asian markets down, over worries China’s export-led neighbours will be disadvantaged after the yuan devaluation, or hurt by a slump in Chinese demand for their goods.  

 

Although Japan’s stock markets have been brushed by the bad news, compared to the potentially negative outlook for under-developed Asian markets, Japan’s seem in a stronger position.  

 

Speculation is mounting that the Bank of Japan will ramp up its ¥80 trillion (£412bn) annual QE programme later this year, in a move that is likely to send the stock market upwards. The Bank is meeting in October and many believe the outcome will be a continuation of the QE part of the “Abenomics” rescue plan, launched by Prime Minister Shinzo Abe at the end of 2013. 

 

This is partly because Japan’s economy is still struggling. Recent data showed the economy contracted 1.6 per cent on an annualised basis in the second quarter. “These figures were slightly better than expected, however it is a large swing [into contraction],” says Adrian Lowcock of Axa Wealth. 

 

The economic contraction does raise question marks over whether Abenomics is helping the economy. However, many experts believe the main effect of QE is to push up the prices of equities, bonds and housing, as this is what happened in the UK and US. 

 

“Whether it is successful depends on what you think it is going to do. If you think it will raise asset prices then it has been a success,” Lowcock says.  

 

Another point to bear in mind is the sheer scale of the asset purchases that the Bank of Japan is undertaking.

 

“QE in Japan is huge: roughly ten times the amount of money has been pumped into the system as in the US, and the economy is a third of the size. Abe means business,” says Darius McDermott of FundCalibre. 

 

QE has devalued the yen by 35 per cent against the dollar over the last 30 months, which is having a positive effect on corporate profits. When overseas earnings are translated back into yen, they seem larger. Ramping up QE should mean the yen falls further again. 

 

“The devaluation of the currency was important as it boosted the profits of the big global Japanese companies,” McDermot says. 

 

But it also means overseas investors in Japan need to hedge, or protect, their investments from being devalued. As such the most popular ETF has been the Wisdom Tree Japan Equity Hedged, which has received $4.8bn in new money this year. 

 

“The big consensus has been to invest in Japan on a hedged basis to take into consideration a further devaluation of the yen,” says Simon Colvin of Markit. 

 

This is closely followed by the iShares Japan fund (an unhedged strategy) with its $4.1bn in inflows. 

 

For investors preferring to use active fund managers, McDermott highlights Neptune Japan Opportunities, Schroder Tokyo and Baillie Gifford Japanese as ones which stand out.