Two Equity Stories You may have Missed

It has been a poor week for equity markets, even as the session's losses are being pared, or even reversed.  Geopolitical tensions, and the fallout from escalating sanctions, are the easily cited culprits, along side some disappointing earnings. 

The point we make is that the correction began before this week.  Many of the European markets peaked in May and June.  The US S&P 500 set a record high on July 24 and gapped lower the following day.  We had identified that gap as significant and anticipated the subsequent sell-off.  Although the 1895-1900 was the first objective,  there is potential toward 1850-1865.  

There are two interesting equity stories that might investors may have missed.  First, the Swiss National Bank has lightened up on its largest US equity holdings.  Yes, the Swiss central bank is one of the few central banks from high income countries that have diversified some of their reserves (around 16%) into equities.  The Federal Reserve, Bank of England, European Central Bank and the Bank of Canada, for example do not have equity investments.  Surveys suggest about 1 in four central banks either have equity investments or will consider doing so. 

The Swiss National Bank's SEC filing revealed that it sold about 0.3% of its stake in Apple in Q2 after reducing its holdings by 10% in Q1.  The SNB trimmed its Exxon and Johnson & Johnson  holdings be 0.2% each after cutting its holdings by 8% and 5% respectively in Q1.  

While these three companies are the Swiss National Bank's largest US equity holdings, it owns a piece of almost 2500 US companies.  It is a passive investor.  Its goal is to maintain the purchasing power of its reserves by replicating a broad based indices.   In this sense, the SNB is not acting much differently than some sovereign wealth funds, such as the Norway's petroleum fund.  

The second equity story that many may have missed is  the activity of the Japan Post Insurance.   There has been much focus this year on the Government Pension Investment Fund (GPIF) and its asset allocation shift, which is anticipated to be toward stocks and away from fixed income.  Exactly when its will do so has been the subject of much speculation.  

Japan Post Insurance was created in 2007 when the postal service was privatized.  It is the largest life insurer.  At the end of March 2008, its equity holdings were estimated at JPY1.8 trillion.  Due to market developments and allocation decisions, by March 2010, its equity holdings had fallen to about JPY100 bln.  Now, however, Japan Post is boosting its equity holdings again.  

According a report in the Nikkei, Japan Post boosted its equity holdings by about JPY230 bln (~$2.2 bln).  This means that it accounted for an impressive 1/3 of the net shares purchased by the financial institutions in Q2.  Its domestic stock holdings stood at JPY650 bln at the end of June (JPY417 bln at the end of Q1). 

Japan Post holds about 60% of its estimated JPY87 trillion assets in government bonds.  Domestic equities do not even account for 1% of its assets.  It is expected to continue to buy domestic stocks going forward, although not at the same pace as seen in Q2. 

The Bank of Japan also owns equities, but perhaps not in reserves, like the SNB.  As part of its qualitative and quantitative easing program, it buys ETFs.  Some observers who expect the BOJ to take additional measures early in the second half of the fiscal year, which begins October 1, suspected increased ETF purchases could be announced.