A short rest before another jump


Fund Commentary
22 May 2015


The Japanese market rose for the fourth consecutive month in April. At the beginning of the month, the market declined following disappointing results regarding corporate sentiment by the BoJ‘s Tankan survey. However, supported by rising equities in other major markets and a depreciating Yen, the Japanese market recovered.

On 10 April the Nikkei 225 reached over 20,000 for the first time in 15 years, then after a stagnant period, the Index reached 20,252 on 23 April before declining towards the end of the month. The Nikkei 225 closed April at 19,520.0 (up 1.6% MoM) and the TOPIX at 1,592.8 (up 3.2% MoM).

In terms of sector performance, of the 33 TSE sectors, 27 appreciated. The best five performers were mining, oil, pulp & paper, banks, and insurance. The worst five performers were metal products, pharmaceuticals, precision instruments, chemicals, and services.

On 1 April the market declined due to disappointing results in the BoJ’s Tankan survey but rose from the following day as the Japan Post Bank announced its plan to increase weighting of risky assets in its portfolio. In mid-April, the market was stagnant but monetary easing in China gave reassurance and on 21 April the TOPIX rose to above 1,600 for the first time in more than seven years. However, the market declined towards month end as the sentiment in major equity markets declined as the US GDP for Q1 15 was below expectation.

The Yen started the month at 120.13 against the USD, and depreciated further as the USD appreciated against all currencies at one point but depreciated to 119.38 by month end.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese Yen basis as of 30 April 2015 increased 5.7% compared with that of 31 March, while the TOPIX rose 3.2% during the same period. The Fund put no new name into the portfolio with no stocks sold out.

The economic data in Japan for March was pretty favourable. Industrial production declined 0.3% MoM but better than the market consensus of -2.3%. Thus industrial production for Q1 15 rose 1.7% QoQ, the second consecutive QoQ rise. The Government expects that industrial production in April would rise 2.1% MoM, and decline 0.3% MoM in May. Housing starts in March rose 0.7% YoY, the first YoY rise in 13 months, and the second consecutive MoM increase. The Household survey showed real consumption in March had risen 2.4% MoM, trade balance in March recorded the first monthly surplus in 49 months on a seasonally adjusted basis.

Against this background, on 30 April the BoJ announced no change in its monetary policy while some economists and investors expected further easing, March 2015 corporate profit results will be released from late April to the middle of May. According to MUFJ, recurring profits (excluding financials) as of 8 May rose 13.0% YoY, 3.7% higher than previous company estimates, but profit forecast by companies for March 2016 would rise 10.4% YoY, much lower than market consensus. Companies tend to show conservative forecast at the beginning particularly when business conditions are favourable. In that sense, the market may react rather negatively to a conservative outlook by companies after the market recorded strong performance from January to April, with the TOPIX up 13.2%. Strong economic data for April, which would start from late May, together with realistic analysts’ forecasts with a more positive tone, should encourage investors to regain sound confidence on the outlook of the economy and corporate profits, bringing the market to a much higher level. The external investment environment is quite favourable with the FRB looking to delay its interest hike programme towards year end; emerging economies starting to recover with continuous monetary easing and oil prices recovering to a happy medium level.

The Investment Adviser strongly believes that the Japanese economy will be able to grow more than 2% annually between FY2015 and FY2018 and the TOPIX will rise to 2,200-2,400 at the end of 2017 from 1,592 at the end of April. Abenomics related domestic stocks should lead the rally for the coming 1.5 years.

Construction and real estate sectors should have more upside potential with replacement demands expanding sharply and the 2020 Tokyo Olympics related projects starting. The Fund is increasing allocation to the machinery sector with the conviction that capex will have to grow to seek higher productivity. The Fund will keep a high weighting in banks and commerce (mainly trading companies) sectors. On the other hand, defensive and technology sectors should be avoided as these have high valuations and lower growth potential.

The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Fund as of 15/05/15 and are based on internal research and modelling.