Energy costs could remain high for a long time

Market Development: In early March, the Japanese market fell sharply due to the war in Ukraine and the rise in Crude Oil prices. The Nikkei 225 fell below 25,000 on 8th March, the first time since Nov 2020. However, as the commodity and Crude Oil prices took a break from rising, an optimistic view that OPEC would increase oil production predominated and the market soared on the 10th.

Commentaire du Fonds
19 Avr 2022

Market Development: In early March, the Japanese market fell sharply due to the war in Ukraine and the rise in Crude Oil prices. The Nikkei 225 fell below 25,000 on 8th March, the first time since Nov 2020. However, as the commodity and Crude Oil prices took a break from rising, an optimistic view that OPEC would increase oil production predominated and the market soared on the 10th.

In mid-March, the Japanese market rallied on the back of the weakening Yen, which supported exporters. Prime Minister Kishida made a statement on the relaunch of the ‘Go To Travel’ campaign, supporting leisure-related stocks. The price of Crude Oil dropped below $94 per barrel at one point, and the FOMC presented their outlook for the key interest rate in 2022; both offering reassurance to the market.

In late March, the market surged again as the Yen weakened further against the US Dollar due to the widening spread between interest rates in the US and Japan. The Nikkei 225 surged for 9 consecutive days leading up to the 25th, recovering to above 28,000. The market fell on the last 2 days of the month from the sale of ex-dividend stocks.

In March, the TOPIX closed the month at 1,946.4 (up 3.2% MoM) and the Nikkei 225 at 27,821.4 (up 4.9% MoM). 24 out of 33 sectors gained. The best five performers were Mining, Commerce, Services, Electricals, and Insurance. The bottom five performers were Metal Products, Textiles, Foods, Pulp & Paper and Construction.

The 10-year JGB yield began at 0.192, and at one point dropped to 0.13, but later gained as the US 10-year Treasury yield kept surging, rising above 0.25 on the 28th. However, the US Treasury yield was adjusted in late March after hitting over 2.5 and the JGB also fell, ending at 0.22. Owing to a widening interest rate gap between the US and Japan, the JPY against the US Dollar opened at 115.0 and continued to decline, at one point reaching 125 on the 28th before ending the month at 121.7.

The Crude Oil price started at 95.7, but when the US and European countries were reported to be considering banning oil imports from Russia, it surged to above 130 on the back of concerns over supply shortages. However, speculation that OPEC would increase Crude Oil production arose and the Crude Oil price levelled, ending the month at 100.3.

Outlook

Industrial production in February rose 0.1% MoM, the first rise in three months. Shipments declined 1.3% MoM with inventories increasing 1.9% MoM. The government estimates that industrial production in March will rise 3.6% MoM and a further 9.6% MoM in April.

According to the Economy Watchers Survey of Business, announced on 8th April, the overall current conditions DI for March recovered sharply by 10.1 points MoM. The household-related DI for March improved by 13.1 points from February, while the corporate sector DI improved by only 2.4 points MoM.

The lifting of emergency infection control measures, announced on 22nd March, has had a greater positive impact on households than on corporations, as corporations have to remain aware of the Ukraine crisis and higher corporate goods inflation. The outlook DI for March also improved to 50.1 from 44.4 the previous month.

The Ukraine crisis remains a significant concern for the world economy and the global markets. However, as long as this war is contained within the region, its impact on the Japanese economy should be limited in our view.

Japan’s exports to Russia in 2021 were JPY 862 billion, 1.0% of total exports and less than 0.2% of GDP, and imports from Russia was JPY 1,549 billion, 1.8% of total imports and 0.3% of GDP. That being said, Russia’s production of energy, such as oil, gas and coal, is more than 10% of global production.

At present, Japan has not implemented any sanctions on energy imports from Russia; for now, Japanese companies can almost cover local energy requirements. That said, the cost of energy has inevitably been rising. Considering the long term, the US, Middle East and Australia could increase their production to offset the reduction from Russia, alongside energy-saving efforts which should be made globally.

However, in the short term, supply and demand conditions will remain tight, with energy prices hovering at high levels. We will have to endure consistently higher inflation, with higher interest rates globally as infrastructure investments are increasing around the world. We believe that Japan is in a good position relatively; Japan is resilient against inflation and has been waiting for it for a very long time.

If this war settles down without any more serious consequences, the Financial sector should be one of the beneficiaries, together with Materials and Industrials.

Portfolio Development

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese Yen basis as of 31st March 2022 went up 8.0% compared with that of 28th February, whilst the TOPIX TR Index rose 4.3% during the same period. The Fund added two new names (Denso and Nishimatsu Construction) into the portfolio and no stocks were sold out.

The Fund continues to be overweight in economically sensitive sectors with cheap valuations such as Trading Companies, Marine Transportation, Iron & Steel and Banking, while defensive sectors such as Foods, Pharmaceuticals, Retail and Utilities continue to be avoided. The Fund takes a very cautious stance towards IT-related sectors.

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.

Adam TurbervilleAdam Turberville
Director
+44 1481 742380
a.turberville@ericsturdza.com

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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 13/04/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.