Overseas Market Tumble: Japanese Stocks Plunge
The financial landscape has been experiencing a tumultuous phase, particularly evident on August 5, when the global markets continued their downward trajectory. Notably, the Japanese stock market took center stage with a severe plunge, further exacerbated by the plummeting performance of numerous cross-border exchange-traded funds (ETFs), many of which approached their daily loss limits. The Nikkei 225 index, a key barometer of the Japanese stock market, witnessed a staggering drop of 12.4% in a single day, with the top thirty positions on the ETF market's daily loss leaderboard being dominated by cross-border ETFs.
This drastic decline has transformed the fortunes of several investment products. The Hi-Tech Nikkei 225 ETF, operated by Huaxin and Mitsubishi UFJ, for instance, saw its net value revert to levels reminiscent of November of the previous year, erasing all gains made since the beginning of the year. Such dramatic shifts raise questions about the stability and predictability of international investments and the sentiments that drive them.
As we extend our view over the year, the once high-performing Qualified Domestic Institutional Investor (QDII) funds are also facing the brunt of this market turmoil, riding a rollercoaster of returns that has sharply narrowed. With the changing landscape in performance metrics and the evident cooling of speculative trading, investment emotions have seen a drastic shift, and the rate of new investors entering the market has also slowed. Currently, only the Huaxia Nomura Nikkei 225 ETF has managed to maintain a premium rate exceeding 5%, while the previously high premiums of other cross-border ETFs have dissipated, and some have even fallen to a state of discount.
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A seasoned investment analyst from Northern China commented on these developments, suggesting that the ongoing external market turbulence makes it increasingly likely for global capital to flow back into Chinese assets. He believes that the probability of the A shares in China experiencing synchronous drops with international markets is low. Presently, the A-share market seems to be at a low point, limiting the potential for further declines.
Nevertheless, he cautioned that while external risks remain, they are not currently the main concern. He anticipates sustained bottom-line fluctuations in the A-share market in the short term. However, given that major external risks have not manifested into predominant factors, and with the strengthening indications of domestic policy aimed at growth stabilization, the probability for market stabilization could increase, potentially catalyzing a transformation in the investment perspective for A-shares.
The market drama unfolded dramatically on August 5, as the overseas markets continued their correction following a week marked by significant downturns in U.S. equities. The Nikkei 225 and the Topix index both opened significantly down, with the Nikkei index's futures even hitting circuit breakers at one point. By the closing bell, the Nikkei had plummeted over 4,451 points, falling below the critical 32,000 mark.
The afternoon session saw a further sharp decline in multiple cross-border ETFs, some reaching their daily limit down. Notably, the Nikkei 225 ETF experienced a drop of 10.02%, while other products, including various technology and Asia-Pacific focused ETFs, plummeted by over 9%. By the end of the trading day, the market showed a clear trend of significant losses in the cross-border ETF category.
The chief economist at Qianhai Kaiyuan Fund, Yang Delong, attributed these steep declines largely to the Bank of Japan's second interest rate hike of the year. The rate was increased from a range of 0% to 0.1% up to 0.25%, which in turn led to a rapid appreciation of the yen, adversely affecting Japan’s export sectors. Additionally, the slowing growth of the U.S. economy and the resultant bearish sentiment in American equities added to the stresses faced by the Japanese market.
Another investment analyst noted the intense volatility in overseas markets is largely due to the release of several important U.S. economic indicators that came in below expectations, further fuelling recession fears among investors. He mentioned that the past two years of concentrated trading focused on U.S. equities and the dollar had hit a pivotal juncture, resulting in heightened market volatility.
A leading QDII fund manager provided insights into the U.S. equity decline from two angles. From a fundamental standpoint, recently released U.S. non-farm payroll figures significantly underperformed expectations, coupled with rising unemployment rates indicating a shifting market sentiment toward fears of a rapid U.S. economic downturn. On a trading level, the sustained rise in technology stocks over recent years had caused a market concentrating on a few popular stocks, leading to diminishing liquidity.
According to this fund manager, the concerning performance of Intel Corporation, which reported losses for two consecutive quarters, served as a trigger for widespread sell-off actions among investors.
If we reflect over a broader timeline, the choppy performance of the U.S. market can be traced back to the release of July 11’s Consumer Price Index (CPI), where the Nasdaq index fell more than 10% from its peak. This bearish sentiment quickly spread to Asian markets, with the Nikkei 225 suffering a nearly 25% decline during the same period.
In the wake of these shifts, the performance of QDII funds has also been a whirlwind. Prior to the current downturn, QDII funds were some of the best performers in the market. Data from Wind showed that on July 10, the average annual return for 301 QDII products was 6.79%, with 17 of them surpassing a 20% return for the year.
By August 2, however, the average return for QDII products had nosedived to 2.43%, showing deterioration in performance. Only one product, the Invesco Great Wall Nasdaq Technology Value Weighted ETF, managed to maintain returns above 20%.
From July 11 through August 2, over 40% of QDII products reported declines exceeding 5%, with some notable products including CCB New Emerging Market Preferred A and Tianhong Global New Energy Vehicles A seeing declines over 14%. The aforementioned CCB product saw its annual return plummet from 41.32% to 16.77%, while Tianhong's performance turned negative, reducing from 15.49% to -1.02%.
The cross-border ETFs reflected even more drastic results. As of August 2, the year-to-date average return for 128 cross-border ETFs showed a reversal from profits to losses, plunging from 3.16% to -0.83%. A significant number of these ETFs, including the Bosera China Education ETF, Bosera Hang Seng Healthcare ETF, and others witnessed declines of over 26%.
The overall atmosphere among investors has cooled considerably. One analyst from Morgan Stanley stated that the prevailing sentiment is leaning toward a risk-off approach, particularly in light of the Federal Reserve’s recent signal that interest rate cuts in September could be considered an option, stemming from a reduced influence of inflation and heightened job market concerns.
With the U.S. manufacturing PMI contracting from 48.5 in June to 46.6 in July, and the last non-farm payroll report undershooting expectations with rising unemployment rates, the volatility in U.S. equities has escalated. This has contributed to a substantial depreciation of the U.S. dollar and caused shifts in investor dynamics. As a result, it is increasingly anticipated that the Fed might opt for rate cuts come September, leading analysts to project a reduction of no less than 75 basis points by the end of the year.
Given the intensifying influence of overseas factors, there's no question that the volatility of foreign markets will have a spillover effect on the A-share market. Nevertheless, the anticipation among domestic investors appears to have reached a level of sufficiency, especially as overseas factors align to bring marginal declines and alleviate the outflows from northbound capital.
Wang Yitang, an analyst from Huaxi Securities, believes that with U.S. equities being valued high, the market's expectation of an impending rate cut cycle, alongside rising unemployment rates intensifying fears of recession, compounded by disappointing earnings during the reporting season for significant stocks, are likely to perpetuate scenarios of correction in U.S. equity markets over the coming months.
Indeed, the collective plunge of cross-border ETFs appears to have encouraged caution among previously exuberant investors. Data indicates a continuous drop in net inflows into cross-border ETFs over the past two weeks, with weekly net inflows decreasing from 7.232 billion yuan to 4.083 billion yuan, with the figure for the week ending August 2 falling to just 3.251 billion yuan.
Simultaneously, a number of cross-border ETFs, such as the Hong Kong Dividend ETF, Hong Kong Technology ETF, and Hang Seng High Dividend ETF, have been experiencing net outflows. Certain products like the Korea-China Semiconductor ETF and the Hong Kong 50 ETF have witnessed consistent capital pressures over the past fortnight.
Moreover, as the market sees corrections and speculative trading sentiments cool down, the previously elevated premiums of cross-border ETFs are rapidly diminishing. On July 10, nine products had an indicative net value premium or discount (IOPV) that exceeded 5%, with the Nasdaq Technology ETF and Asia-Pacific Select ETF showing premiums of over 10%. However, by August 5, only one cross-border ETF, the Huaxia Nomura Nikkei 225 ETF, maintained a premium rate above 5%, while other once high-premium products like the Asia-Pacific Select ETF and Nasdaq ETF now showed signs of discounting.
Taking the Asia-Pacific Select ETF as a specific example, data shows that it surged by 23.82% during the five-trading day stretch from July 3 to July 9, bolstering its IOPV premium to an astonishing 20.47%. However, post July 10, the ETF entered a corrective phase and has seen its cumulative decline exceed 30% by August 5, with its IOPV premium slipping to -0.2%.
This turbulence showcases the intricate dynamics of global financial markets, highlighting both the rapid shifts in sentiment and the interconnectedness of global economies. Investors and fund managers alike are on high alert as they navigate this increasingly complex environment, balancing the nuances of domestic policies, international trends, and the ongoing ripple effects from distant markets.