Nikkei gains as foreign funds snap up financials

By Antoni Slodkowski and Ayai Tomisawa

TOKYO (BestGrowthStock) – Japan’s Nikkei average climbed 0.5 percent on Thursday and briefly hit a seven-month high as foreign funds shifted their focus to financials from exporters in their continued buying spree in Tokyo stocks.

Buying by overseas investors has helped drive Tokyo equities 12 percent higher since the beginning of November. Capital flows data showed they were net buyers of Japanese stocks for a fifth straight week last week.

Investors said momentum players are increasing their holdings in Tokyo shares, with funds looking beyond exporters and aggressively adding underweight financial stocks as the Nikkei claws toward the 10,300 mark.

“Valuations of financial stocks are just millimeters from historic lows and they’re also attractive as they have one of the highest dividend yields on the market,” said Nicholas Smith, director of equity research at MF Global FXA Securities in Tokyo.

According to Thomson Reuters StarMine, financial shares are the most undervalued among Tokyo equities with a price-to-book ratio of 0.7 times, while their average dividend yield stands at 2.4 percent, one of the highest on the market.

“Financial shares are also attractive as they tend to be more domestic than other equities and because of that less tied to exchange rates and other factors that are causing problems for exporters,” Smith said.

The benchmark Nikkei (.N225: ) closed the day up 0.5 percent at 10,285.88. At one point it hit a seven-month high of 10,298.25.

The broader Topix index (.TOPX: ) rose 0.5 percent to 891.60.

The securities sector (.ISECU.T: ) outperformed the broader market with a 3.2 percent jump, while the insurance sector (.IINSU.T: ) added 2.9 percent and banking (.IBNKS.T: ) gained 2.6 percent.

Banks were also boosted after positive indications for the sector helped their U.S. and European counterparts gain.

U.S. banks climbed as the spike in Treasury yields has made lending and trading more profitable while European bank shares gained as investors bet that concerns about the euro zone debt crisis will slowly abate and financials will perform well.

Mitsubishi UFJ Financial Group (8306.T: ), Japan’s biggest bank by assets, jumped 3.7 percent to 417 yen, while Sumitomo Mitsui Financial Group (8316.T: ) added 3.5 percent to 2,712 yen.

FOREIGN BUYING

Foreign investors bought a net 210.7 billion yen ($2.5 billion) of Japanese stocks in the week to December 4, the highest since early April, finance ministry data showed.

They were net buyers for the fifth straight week, bringing their total net buying to 730.6 billion yen over that period, and were net buyers for nine out of the last 10 weeks.

“Foreigners are still in a phase of raising their weighting for Japanese stocks as they have outperformed other markets over the last few months. Their buying is the key reason behind the Nikkei’s strength,” said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.

The Nikkei’s 12 percent gain since November has outpaced other markets. The Dow Jones industrial average (.DJI: ) rose 2.2 percent, while the Shanghai Composite Index (.SSEC: ) fell 7.2 percent during the same period.

Market analysts are also bullish about the longer term. The Nikkei is likely to end 2011 at the pre-Lehman bankruptcy level of 12,000, according to a median forecast of 24 market participants polled by Reuters in the past week. Projections ranged from 9,200 to 14,000.

The Nikkei reached a session high of 10,298.25 — the highest since May 18 — but ran out of steam as investors sold to adjust positions ahead of the settlement of futures and options prices on Friday and as technicals showed signs of overheating.

The Nikkei’s short-term up-down ratio, which compares the number of shares that have risen against those that have fallen over a 25-day period, was now at its highest level since 1977, at around 158.27, said Yumi Nishimura, a senior market analyst at Daiwa Securities Capital Markets.

A figure above 120 is seen as overheated.

The dollar took a breather in Asian trade on Thursday, standing at 83.76 yen after reaching a high of 84.31 yen on trading platform EBS the previous day.

“The dollar’s recent firmness is clearly positive for Japanese stocks, but the market needs to consolidate before extending more gains,” Daiwa SB’s Ogawa said.

Trading volume reached 2.12 billion shares on the Tokyo exchange’s first section, the highest since November 30 and well above last week’s daily average of 1.8 billion.

Advancing shares outpaced decliners by 808 to 686.

(Additional reporting by Chikafumi Hodo; Editing by Chris Gallagher)

Nikkei gains as foreign funds snap up financials