Market Development: The Japanese market initially fell in early November, following the US market which pulled back after the hawkish comments made by the Fed Chair following the FOMC meeting on the 1st and 2nd, but regained when the US employment data didn’t indicate the need for further tightening.
In addition, Japan’s cabinet has approved the JPY 29 Tr supplementary budget which may have also affected the market positively.
In mid-November, the market gained after US CPI growth was lower than the market’s expectation, and hopes surged for a slower pace of rate hikes. Expectations for China to revise its zero-COVID policy also materialised and supported the market.
In late November, the TOPIX topped 2,020 at one point – the highest level since January. A report that Berkshire Hathaway increased its equity share in Japanese trading companies, and a festive mood from Japan’s victory over Germany in the World Cup, are also likely to have supported the Japanese market. That said, an increase in COVID infections in China weighed on the market and the gains inched down.
In November, the TOPIX closed the month at 1,985.6 (up 2.9% MoM) and the Nikkei 225 at 27,969.0 (up 1.4% MoM). 24 out of 33 sectors gained. The top five performers were Marine Transportation, Wholesale, Banks, Nonferrous-metals and Steel. The bottom five performers were Precision Instruments, Rubber, Oil, Communication and Other Products.
The 10Yr JGB yield started at 0.248 and remained quite stable, although the US long-term yield declined from 4.048 to 3.605. The JPY against the US Dollar opened at 148.71, and at one point depreciated to 137.50 as the rate gap between the US and Japan narrowed, before ending at 138.07. The Crude oil price began at 86.53, rising close to 94 at one point, but declined, and settled at 80.55 at month end.
The Japanese economy remains stable although some volatility persists. Industrial production in October declined 2.6% MoM. This is the second consecutive MoM decline, suggesting a reactive correction after catch-up production in August pushed output up by approximately 14% from the bottom in May.
Shipments were down 1.1% MoM with inventories down 0.8% MoM. The government forecasts that industrial production will recover 3.3% MoM in November and rise a further 2.4% MoM in December. The Core CPI (excluding fresh food) nationwide rose 3.6% YoY in October, the highest level since February 1982 and significantly higher than September’s figure (up 3.0% YoY).
Price hikes were spreading from energy to foods, non-durable consumer goods and service costs. According to the BoJ’s short-term economic survey “Tankan”, in December, business conditions DI for large manufacturers decreased slightly from +8 in September to +7.
In contrast, the DI for large non-manufacturers improved by 5 points from September to +19, the highest level since December 2019. This reflects the effects of factors such as Japan’s economic reopening, nationwide travel subsidies and the lifting of restrictions on inbound tourism. The CapEx plans at large companies (all industries) were achieved with +19.2% YoY, almost at peak level.
The US economy has begun to see some signs of inflation peaking with the Fed continuing to tighten its monetary policy. That said, we believe the CPI in the US will not go down to 2% as the market hopes, instead remaining around the 3-4% level for the coming 1-1.5 years as the labour market may continue to be rather tight, with infrastructure investment supporting the economy. Therefore, the 10Yr bond yield will likely rise towards 4-5% if the Fed Fund terminal rate goes over 5% in mid-2023.
On the other hand, Japan is going to see the normalisation of economic activity. We believe that wage hikes in the next year will be more than 3.5% and that this trend may continue for several years to come. The rise in inflation and salaries appears to be finally ending the era of deflation.
Investments in Japan have become attractive once again due to the weak Yen. In our estimations, Japan’s 10Yr bond yield will likely rise to 1.5-2.0% in 1-2 years. Global infrastructure investment should materialise to support the global economy.
In Japan, we expect personal consumption to recover, and corporations will be encouraged to increase CapEx to seek higher productivity. Further, we believe that corporations will consider the relocation of production facilities to Japan. We expect the TOPIX to target 2,500 by the end of 2023 with Industrials and Financials leading the rally.
The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese Yen basis as of 30th November 2022 increased 6.9% compared with that of 28th October, whilst the TOPIX TR Index rose 2.9% during the same period. The Fund did not add any new names to the portfolio and no stocks were sold out.
The Fund continues to be overweight towards economically sensitive sectors with cheap valuations such as Trading Companies, Banking and Steel, while defensive sectors such as Foods, Pharmaceuticals, Utilities, and IT-related sectors such as Electricals and Communications continue to be underweighted.
As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio. Please do not hesitate to contact us for further information.
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The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Funds as of 16/12/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.