Some Investors in Japan Are Worried MiFID May Stunt the Bull Run

(Bloomberg) -- As Europe's new rules for research and trading get underway, some investors in Japan are worried that they may have a negative effect on their surging equity market.

The theory is simple enough, and by no means limited to the Asian country. European investors will be more reluctant to buy Japanese shares, because local brokerages will be less able to pitch stocks to them now that the European Union's revised Markets in Financial Instruments Directive has come into effect, according to Shinkin Asset Management Co.

“This could lead to diminished interest in Japanese equities from European investors,” said Naoki Fujiwara, chief fund manager at the money manager in Tokyo. The new regulations would make it difficult for local brokerages to even approach European clients, he added, while noting that any immediate impact will be small.

Resona Bank Ltd. says European investors will probably reduce the number of brokerages from which they get research on the Japanese market and individual stocks, and instead rely on global macroeconomic views. They bought net 1.4 trillion yen ($12.8 billion) of Japanese equities last year, the largest sum since 2013.

MiFID II requires money managers to pay for research separately from trading fees in order to create transparency and police conflicts of interest within banks. In other words, investors will no longer be able to pay for research by routing trading commissions to investment banks, making it more expensive as brokers decide how much to charge for research and access to top executives.

The rules could end up “penalizing investors who want to buy Japan from Europe,” said Andrew Clarke, director of trading at Mirabaud Asia Ltd. in Hong Kong. The Nikkei 225 Stock Average started the New Year with its best opening day performance since 1996. The blue-chip gauge last week capped its best year since 2013 with a 19 percent gain.

Here are comments from other equity strategists and fund managers in Japan and elsewhere in Asia:

Ayako Sera (market strategist with Sumitomo Mitsui Trust Bank Ltd.):

• Europe may have opened Pandora's box with MiFID II
• Access to valuable information will be limited to select firms
• Expects “huge internal resistance” if domestic firms need to budget to access information on individual Japanese stocks
• “People will watch very closely how the U.S. reacts to this”

Yoshinori Shigemi (global market strategist at JPMorgan Asset Management Japan Ltd.):

• “People in the U.S. and Japan will observe whether how effective the new rules turn out to be for Europe, it might not work that well.”
• JPMorgan's offices in Europe are taking necessary steps in response to the new rules, but it doesn't involve Japan as yet

James Rippey (EMEA chief operating officer for Nikko Asset Management):

• Regulations may filter down to Asia in the longer-term but there is no indication that this will happen any time soon
• Sees no material change to the company's business model outside of Europe post-MiFID II
• Sees continued demand for boutique research firms, providing high quality, specialist service to asset managers

Alan Richardson (fund manager at Samsung Asset Management Ltd.):

• “I continue with status quo. I am not affected by European regulation.”
• “My investing style benefits from wide research flow not just pockets of information sources.”

Hajime Sakai (chief fund manager at Mito Securities Co.):

• The global trend seems to be for regulations like MiFID II to spread and Japan is likely to change accordingly in due time
• Japan is getting stricter on the financial industry in its own way. For example, analysts' research activity is running up against various limitations

--With assistance from Livia Yap

To contact the reporter on this story: Min Jeong Lee in Tokyo at mlee754@bloomberg.net.

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Tom Redmond

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