Shareholders are cheering the record share price of Fast Retailing Co., the operator of casual fashion giant Uniqlo that’s just become the most valuable apparel retailer in the world.
But some other market observers are sounding notes of caution over the stock’s ever-increasing influence on the 225-issue Nikkei average of the Tokyo Stock Exchange, as technical changes caused by its recent highs raise its already-outsized impact on the blue-chip gauge.
A fivefold increase in Fast Retailing’s tick size — the minimum amount by which the stock can move up or down — and a surge in its weighting in the index mean the Nikkei’s rise is increasingly intertwined with that of the casual clothing firm, even as Japanese stocks look to test record bubble-era highs.
Fast Retailing has risen about 80% in the past 12 months and the price per share broke the ¥100,000 level on Tuesday, making it the only listed company in Japan to trade at such a value. That triggered a technical change, as under Japan Exchange Group Inc. rules the tick size on stocks trading above ¥100,000 jumps to ¥50.
"Each step gets bigger. Up to ¥99,999 it only moved ¥10 a tick,” said investor Taketsugu Agari. "The Nikkei 225 may become ever-more dominated by moves in Fast Retailing.”
In the last six months alone, the apparel-maker has contributed more than 1,600 points to the Nikkei, single-handedly responsible for nearly a quarter of the index’s 31% gain in that time.
Junichi Hashimoto, senior quants analyst at Daiwa Securities Co., says that while the tick size is unlikely to be an issue in the short term, it could be a concern over longer periods. "If the price is consistently high, when it falls the impact will be greater, and the volatility could increase,” he said.
That’s further compounded by Fast Retailing’s outsized weighting on the index. The Nikkei is a price-weighted gauge, meaning that the arbitrary price of an individual share determines how much of the index a company makes up. At ¥100,000 a share, Fast Retailing is a giant.
That weighting stands now at a record 12.8%, higher than the largest weighting on any other developed market benchmark. While Fast Retailing has been the dominant force on the Nikkei for a decade, its proportion on the index has surged along with its share price, forcing passive investors to buy more of the stock as the Nikkei gains.
The biggest stock on the Dow Jones Industrial Average, UnitedHealth Group Inc., makes up 6.8% of that price-weighted measure. On Japan’s broader Topix index, Fast Retailing is the 41st largest weighting, making up just 0.5%.
That has sparked concern among some such as Takashi Ito, a senior strategist at Nomura Securities Co., who notes that what goes up could also come down — fast.
"If long-term investors change their outlook and decide to cut back on their holdings of Fast Retailing, then the Nikkei 225 could unravel pretty rapidly,” he said.
One option to fix this would be a stock split — the method that drove Apple Inc.’s share of the Dow Jones from around 12% to less than 3% last year, in turn triggering a boost in its share price by making it easier for retail investors to buy in.
But Fast Retailing has long demurred on the idea of splitting its shares. In response to questions from Bloomberg News, the company said that it wasn’t considering a stock split, directing investors to a periodic statement on the appropriateness of the size of its investment units.
Still others are less concerned about what’s long been known as an issue with price-weighted measures such as the Nikkei. Makoto Sengoku, a market analyst at Tokai Tokyo Research Institute, argues that criticism of Fast Retailing for skewing the Nikkei "isn’t anything new.”
"You also have to give credit to Fast Retailing for having reached this share level,” he said.
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