Biden’s victory and COVID-19 vaccine breakthrough brings shift from growth to value

Market Overview: In October, the TOPIX closed down 2.8% at 1,579.3 with the Nikkei 225 down 0.9% at 22,977.1. With few significant events or news domestically, the Japanese markets were fluctuated in response to news about the COVID-19 pandemic and the potential for additional US economic stimulus measures.

MONATLICHER FONDSKOMMENTAR
23 Nov 2020

Market Overview: In October, the TOPIX closed down 2.8% at 1,579.3 with the Nikkei 225 down 0.9% at 22,977.1. With few significant events or news domestically, the Japanese markets were fluctuated in response to news about the COVID-19 pandemic and the potential for additional US economic stimulus measures.

In the first half of the month, the Japanese markets were rather solid by expectations for additional stimulus measures to be quickly passed in the US. With Joe Biden appearing to be ahead in the race for the US President, the markets gained support from expectations for large-scale public spending.

But from mid-month, the stimulus talks got bogged down and concerns over the economic outlook in Europe rose on a sharp rise in the number of COVID-19 infections. Towards the end of the month, fresh lockdowns came into effect across major European economies, US equities declined sharply in the last week of October.

Japanese stock prices also fell in reaction to this decline. Trading value on TSE-1 was very thin in October with average daily trading value coming down to JPY1.9 trillion, below JPY2 trillion for the first time since December 2019. 10 year Treasury yields, which were 0.68% at the end of September rose to 0.87% at the end of October. 10 year JGB yields also rose from 0.02% to 0.04% during the periods. USD / JPY started the month at 105.48, and ended at 104.66.

Among 33 sectors in the TOPIX, the best five performers were Marine Transportation, Insurance, Metal Products, Electricals and Communications, while the worst five performers were Pharmaceuticals, Mining, Land Transportation, Miscellaneous Finance and Warehousing & Harbour Transportation.

Market Outlook

The Japanese economy is continuing to recover soundly. Industrial production in September rose 4.0% MoM, better than market consensus (+3.0%), recording four months consecutive monthly increase.

When we look at production categories, durable consumer goods including automobiles increased strongly 12.1% MoM and saw a sharp rise of 52.6% QoQ in 3Q (July-September), while capital goods excluding transport equipment remained weak at up 0.7% MoM with 3Q output declining 4.9% QoQ. But capital goods production may start to rise acceleratedly from now on, judging from recent machine tool orders.

The government forecasts that industrial production in October would rise 4.5% MoM and further increase 1.2% MoM in November. Corporate profits are also improving. According to SMBC Nikko, as of 12 November, 90.5% of companies listed on TSE-1 announced corporate profits results for 1H of FY2020 ending September.

Recurring profits for 1H declined 37.3% YoY, but the companies forecast that recurring profits for 2H of FY2020 would improve to 0.0% YoY. But most important point for the market is what kind of economic policies will be taken by the new administration in the US. US presidential election ended with the victory of Joe Biden, the Democratic Party, although Donald Trump refuses to concede the US presidential election. But how easily Mr. Biden can put his economic policies such as, infrastructure spending, healthcare, climate, tax and so on into practice could depend on largely the final results in the Upper House, which we have to wait until January 2021.

In that sense, uncertain conditions on US economic outlook may be hovering for a couple of months. The current markets look to pay attention on potentially positive factors only. But we might see some negative reactions for a short term.

For a longer term, we should regard Biden’s victory positively as the world economy would be lifted by anticipated increase of infrastructure spending, and global trade activities can be incentified. This should be the trigger for the market to change its leadership from growth oriented sectors such as IT to economic sensitive value sectors such as financials and cyclicals. The recent hot news on COVID-19 vaccine breakthrough by Pfizer-BioNTech should boost the change.

Portfolio Development

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese Yen basis as of 30 October 2020 went down 4.7% compared with that of 30 September whilst the TOPIX declined 2.8% during the same period. The Fund added no new names to the portfolio with no stocks sold out.

The Fund continues to be overweight in economically sensitive sectors with cheap valuations such as trading companies, construction, real estate and banking, while defensive sectors such as foods, pharmaceuticals and utilities continue to be avoided.

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The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Fund as of 16/11/2020 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.