It is a measure of just how crankily despondent Tokyo brokers have become when a $50bn quarterly loss by the world’s biggest pension fund makes the world seem rosy.
The Government Pension Investment Fund (GPIF) dropped its red ink grenade last Friday evening: stabbing an accusatory finger around the world to explain ¥2.25tn and ¥2.4tn valuation losses in, respectively, domestic and foreign equities. For the brokers, desperate for a bullish line and watching through the increasingly distorted prism of the GPIF and Bank of Japan’s combined ¥39tn ownership of the Japanese stock market, loss spells upside.
The GPIFs figures for the end of June showed its holdings of domestic and foreign stocks at about 21 per cent apiece of the overall portfolio. The fund’s target for both is 25 per cent.
Simple, said the brokers, producing their back-of-envelope calculations: the GPIF’s current position is about ¥5tn underweight Japanese equities and the rebalancing spree could begin any moment now. The fact that the fund will be buying foreign bonds and equities at the same time is even better, say the FX strategists, because it puts a natural ceiling on the yen’s rise against the dollar. The more breathless proponents of this thesis even predict that rarest of joys — upward price squeezes as foreigners come back into a market where the GPIF and BoJ have both absorbed liquidity and are still buying like crazy.
Setting aside the background weirdness of a situation where the government, in one form or another, is now the largest shareholder in a quarter of Tokyo 1st Section stocks, the bull story still requires a huge leap of faith.
Japanese shares will only truly rally when the foreigners return from their now prolonged absence as net buyers. The theory that the GPIF and BoJ can lure them back is tempting, but not compelling. Japan is attractive, generally speaking, to two types of outsider: macro funds that have fallen for a Big Picture narrative like Abenomics, or value investors entranced by under-priced quality.
The problem, though, is that between the GPIF and BoJ’s mega purchases, the market is losing its power to price either value or narrative. Sometimes, a $50bn loss really is bad news.
Get alerts on Pensions industry when a new story is published