Nikkei slips, investors mull outlook for China-exposed firms

Tue Sep 18, 2012 3:35am EDT

* Fast Retailing suffers as Uniqlo closes more China stores
    * Nissan Motor hit 7-week low after halting production in
    * Softer yen boosts some exporters; Canon, Mazda up

    By Dominic Lau
    TOKYO, Sept 18 (Reuters) - The Nikkei average fell on
Tuesday as companies heavily exposed to China were caught up in
tensions between China and Japan over a territorial dispute that
disrupted business and production,  and left investors pondering
unsettled scenarios.
    Should the anti-Japanese protests in China worsen or the
dispute over the islands escalate, China-related companies would
likely see further sell-offs as their earnings from the world's
second-largest economy could come under pressure.
    But were the matter resolved quickly, analysts said,
Tuesday's sell-off in some China-exposed names would give 
investors a handy buying opportunity.
    "Chinese factors have two aspects: if the situation
prolongs, then it would weigh on the Nikkei and if the problem
is resolved soon, it would spur a buy-back," said Masayuki
Doshida, senior market analyst at Rakuten Securities.    
    The Nikkei share average ended 0.4 percent to
9,123.77 after rallying 1.8 percent on Friday after the U.S.
Federal Reserve launched its QE3 round of stimulus. Monday was a
public holiday in Japan.         
    "The concerns are what, if anything, these Chinese protests
turn into," said a senior dealer at a foreign brokerage said.
    Investor demand for put options outpaced demand for calls.
Societe Generale analysts said most popular put options on the
Nikkei with an October maturity had a strike price at 8,250
, nearly 10 percent below Tuesday's close.
    The next most-traded was a put option at 8,750
, followed by a call at 9,500 and
another put at 8,000.  
    Nissan Motor Co sank 5 percent to seven-week low
and was the most-traded stock on the main board by turnover
after the automaker said on Monday it had suspended production
in China for two days, while Honda Motor Co dropped 2.5
    Construction machinery makers Komatsu Ltd and
Hitachi Construction Machinery Co Ltd, which have
considerable exposure to China, lost 1.8 and 2.3 percent,
    Fast Retailing sagged 7 percent, hitting a
one-month low and marking its worst one-day percentage loss in
three months, after it said it would close more of its Uniqlo
clothing stores in China on Tuesday, as it expects anti-Japan
demonstrations there to escalate. 
    Other retailers have also closed many of their stores in
China. Supermarket operator Aeon Co Ltd, which shed 2.8
percent, said it had closed 30 of its 35 stores in China as of
    The broader Topix index added 0.2 percent to 758.36,
with nearly 1.8 billion shares changing hands, down from a
six-month high of 2.5 billion reached on Friday but up from last
week's average of 1.62 billion.
    The softer yen supported some exporters, with Mazda Motor
Corp up 1 percent, Canon Inc adding 1 percent
and industrial robot maker Fanuc Corp gaining 1.7
    The yen was quoted at 78.656 to the dollar on Tuesday
and had retreated as far as 78.93 on Monday, a one-week low,
pressured by speculation the Bank of Japan might ease policy
later in the week. It was well off a seven-month high of 77.13
hit last Thursday after the Fed announcement.
    CLSA said the Japanese market "offers dirt-cheap optionality
on an upturn in global markets."
    "Japan is downside-protected, where Western markets have
factored in good things that haven't happened yet. Topix has a
strong track record as the geared play on global markets," said
Nicholas Smith, Japan strategist at CLSA in a report.
    According to Thomson Reuters Datastream, the Topix carries a
12-month forward price-to-book ratio of 0.82, much cheaper than
the U.S. S&P 500's 19.3 and the pan-European STOXX Europe
600's 1.33.
    The Nikkei is up 7.9 percent so far this year,
underperforming a 16.2 rise in the S&P 500 and a 12.5 percent
gain in the STOXX Europe 600.
    Ryota Sakagami, chief strategist at SMBC Nikko Securities,
said the Fed move would stimulate U.S. economic growth and drive
the so-called "risk-on" trade, which will help keep the yen
    "This uptrend will continue until the end of November before
the market starts to discount the impact of a fiscal cliff in
the U.S. I think in one to two months, the Japanese market will
outperform the global market," Sakagami said.
    He added that his year-end Nikkei target was 10,500 to
11,000, at least 15 percent upside from Tuesday's close.
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