BY YUTAKA UDA
In February, the Japanese stock market was subject to very volatile and sharp movements. The Nikkei 225 closed the month at 22,068.2 (down 4.5% MoM), while the TOPIX ended the month at 1,768.2 (down 3.7% MoM), with both indices declining for the first time in six months.
The average daily trading value on the TSE-1 was high, standing at JPY 3.2 trillion. The market kicked off the month with a rebound in stocks, bolstered by the strength of the New York market and an end of the yen appreciation.
Data on US jobs, released on 2nd February, showed an increase in hourly wages of 2.9% YoY, fuelling concerns that the Fed would move quickly to raise the key rate, prompting US long-term interest rates to surge, and US stocks to tumble. The DJIA fell by over 1,000 points on both, 5th and 8th February.
The heavy loss in the New York market caused uncertainty and volatility in global markets. The Nikkei 225, which had recovered to a 26-year high and surged above the 24,000 mark on 23rd January, retreated more than 1,000 points on 6th February, temporarily falling below 21,000 on 14th February. The JPY appreciated from 109 in early February to 105 (intraday) against the USD on 16th February.
In the second half of the month, the Japanese market recouped some of the losses as investors took a positive view on an end to both, rising US long-term interest rates and a yen appreciation against the US dollar. The Fed chair Jerome Powell’s bullish stance on the economy, indicated in his inaugural congressional testimony on 27th February, reignited concerns that US interest rate hikes might pick up in pace, leading US stocks to decline. At the same time, China’s manufacturing PMI missed expectations. Against this backdrop, the Japanese market fell once again on 28th February.
In terms of sector performance, the five best performers were precision instruments, pharmaceuticals, miscellaneous manufacturing, retail and utilities, while the five worst performers were marine transportation, rubber, mining, non-ferrous metals and glass & ceramics. WTI crude oil declined from 64.7 $/bbl to 61.6 $/bbl during the month, while the US dollar started the month at 109.2, finishing at 106.7 against the yen.
The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 28th February 2018 declined 5.1% compared with that of 31st January, while the TOPIX fell 3.7% during the same period. The Fund put one new name (Nippon Steel & Sumitomo Metal) into the portfolio with one stock (Rohm) sold out.
Following Mr Trump’s announcement on 1st March that the US would impose heavy tariffs on US steel and aluminium imports, global markets tumbled. At the same time, Gary Cohn, Head of the National Economic Council in the US, resigned. Total steel and aluminium imports account for only approximately USD 50 billion in the US, but investors fear that this move may lead to retaliation from trading partners such as Europe and China, resulting in trade wars or broader protectionist measures around the world. On 8th March, President Trump officially approved tariffs on steel and aluminium imports, however announced that key allies could apply for exemptions, following growing concerns in Washington that close friends and trading partners may distance themselves from the US.
The Investment Adviser hopes that the US will find ways to reduce its large trade deficit in collaboration with trading partners, as has been the case in the past.
The Japanese economy itself remains in good shape. Real GDP in Q4 2017 was revised up from 0.5% QoQ annualised to 1.6%. The main contributor was private capital expenditures, which was revised up from 2.8% QoQ annualised to 4.2%. Industrial production declined 6.6% MoM in January 2018 with shipments down 5.6% MoM and inventory down 0.6% MoM, partly due to heavy snow in the Japanese islands. The government estimates that industrial production in February will rise 9.0% MoM, and subsequently decrease 2.7% MoM in March.
Inflation is creeping up gradually with core CPI (excl. fresh food) up 0.9% YoY, higher than the market’s consensus estimates of 0.8% YoY. The team anticipates core CPI to rise 1.0% YoY within a few months. The recent strength of the yen against the US dollar however remains a worry. Nevertheless, the yen already touched the lower end of its 105-115 trading range against the US Dollar, with the105 level appearing to only be temporary as the interest differential between the US and Japan should widen further.
The next rise of the FF rate at the FOMC meeting on 20-21st March should trigger the yen to increase back to a 110 level. The team thinks that the correction of -11.3% from 23rd January to 5th March is healthy and a speedy adjustment decline. The economy is expected to continue to expand for another couple of years, with equity valuations remaining very cheap, both relatively and historically. Market volatility may persist for some time, but the Investment Adviser believes that the market should start to regain strong momentum from late March onwards, with this correction creating a golden opportunity for investors to be able to participate in an anticipated sharp recovery.
The Fund is increasing its allocation to cyclical sectors such as steel, non-ferrous metals, and chemical together with energy since infrastructure demands should support or lift global economic growth. The Fund retains a positive stance on banks, trading companies and machinery, while defensive sectors such as foods, pharmaceuticals and utilities continue to be avoided.
The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Fund as of 09/03/18 and are based on internal research and modelling