Wednesday, November 4, 2015

Japan Post Holdings IPO => How Hedge Funds Think! Short and Long Term! 日本郵政ヘッジファンドのアイデア!

Financial history was made on November 4, 2015, when the Japanese government finally privatized Japan Post. It was the 10 year brainchild of former prime minister Koizumi. This was the biggest IPO privatization since 1998. With 15%, 25% and 55% returns on day one of the IPO, all seems to have gone well.

There have been many big Japanese IPO privatizations, and most have done well well for retail investors. Back in 1998, it was NTT Docomo, and before that 1987 saw the privatization of NTT itself. The price per share was on the high end of the initial range,and was full of interest. However, is it a short term trade? or a longer term investment? Manys factors indicate it will do even better longer term.

How do hedge funds think about this IPO? How are they figuring out this trade? How many angles need to be figured out before next week, after the IPO? are there different layers of this trade? if so, how many ways are possible for further returns via retail or institutional buying actions? 

The big picture is that this IPO may trigger the retail investor in Japan to finally buy equities more broadly. For many years, savings with the more risk averse elderly, have remained within JGBs & CDs. This month could see a huge trend in the savings pattern of "Mrs Watanabe". Only this kind of offering could change her habits by moving from debt to equity. All this, providing liquidity within the TSE. 

Unlike in 1998, the amount of online trading in Japan by day traders, has increased many multiples. This relatively new active retail investor base has not been seen for an IPO of this scale. The mythical "Mrs Watanabe investor" is more buy and hold. There are many ways to trade, and day traders will have a strong spin on the first days of trading. The larger number of less active retail investors though will watch and wait for a much longer period. 

Institutional investors who did not get as much initial allocation pre-IPO may use those extra funds to buy post IPO if the first days move positively. How much money is "waiting in the wings" may be underestimated. Given the limited 11% or so of float, a lot of frustration may see post IPO buyers and boost the price higher than with other privatizations. 

A lot of government credibility is behind this deal more than others of the past, so momentum may be much stronger than seen on the surface. So far, 8 out of 10 Japanese privatizations have gone well longer term, and Japan Post may be another. The "feel good factor" may continue beyond this first trade. The retail taste for more equity returns may force more bond savers to re-allocate towards equities this year and next at a retail level. 

The overall market works in pure beta, and may be evolving, so anticipating this core change is where hedge funds are thinking now. Will the other 8 privatizations get a second wave of buying interest? Will the 0.47 book value on the Japan Post Bank rise to equal and surpass 0.7 with most mega banks? will this be the first exit before some profits are taken off the table? 

If the IPO goes well, which vendors will benefit most from the raised cash? Are there local pockets of Tohoku industries that are best positioned to benefit? The questions are endless, but the mind set remains the same. The market knows what it is doing but hedge funds need to figure out what that is. Seeing the pattern first, and being in front of it, is the core way of making money when small and nimble. 

This is a very historic IPO, and could be the first domino of many that may be positive for Japanese equity markets. This means not just today, but for some time to come. Let's keep an eye on how things are changing because global hedge funds already are.

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