Asset bubble to start as vacancy rates declined below 5% level


Fund Commentary
20 Aug 2015


In July, the Japanese market was volatile as the result of external macro developments such as the Greek debt problems and a sharp decline in the Chinese market. However, Japanese domestic numbers such as consumer sentiment, industrial production, core private sector machinery orders and inbound traveller numbers were brisk and supported the market.

At the beginning of the month, the market rose as a result of the BoJ Tankan survey which showed improvements in the business conditions that were higher than consensus expectations. However, when the possibility arose of Greece leaving the Eurozone, the market reacted negatively. Furthermore, on 8th of July trading in almost half of the listed stocks in China were suspended due to company requests given fear of further large drops in the stock market. This lead to a decline in the Nikkei 225 and the TOPIX of 3.1% and 3.3% respectively, the largest declines year-to-date. On the 15th of the month, the Greek parliament approved the new fiscal consolidation plan and shares rose for 6 consecutive days, with the Japanese market almost reaching this year’s record high. At the end of month, the market stabilised following the release of good 1Q results. The Nikkei 225 closed the month at 20.585.2 (up 1.7% MoM) and the TOPIX at 1659.5 (up 1.8% MoM).

In terms of sector performance, of the 33 TSE sectors, 23 appreciated. The best five performers were air transportation, utilities, food, land, transportation, and miscellaneous manufacturing. The worst five performers were steel, machinery, electricals, nonferrous metals and metal product.

The JPY started the month from 122.50 against the dollar and was rather stable throughout the month due to the continued uncertainty over the timing of the Fed rate hike, ending the month at 123.89.

The net asset value per share for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 31 July 2015 rose 0.9% compared with that of 30 June, while the TOPIX went up 1.8% during the same period. The Fund put no new names into the portfolio with no stocks sold out.

At present, investors are a little cautious on the outlook for 2Q 2015 GDP due to be announced on 17 August, as the export environment is not favourable due to the stagnant Chinese economy. Inventory adjustments are taking place in the car and some materials industries, a technical set back following the strong 1Q data. The government is focused on passing defence related bills in the Diet. But after 2Q data is reported, people may start to look at 3Q onwards, which the Investment Adviser believes should be quite good. Industrial production in June rose 0.8% MoM, slightly better than the market forecast of +0.3%, but the production for April-June declined 1.5% QoQ, marking
the first decline in three quarters. The government estimates that industrial production in July would rise 0.5% MoM and further rise 2.7% MoM in August. Spring wage hikes and better summer bonuses should start to contribute to higher consumption from 3Q. A re-shoring of manufacturers will start to contribute to an export recovery and China may act to utilise fiscal spending more vigorously to tackle the current problems such as the slowing economy and collapsing stock market. The Abe administration will be able to concentrate on economic policies from mid-September.

According to Miki Shoji, the property research agency, vacancy rates at the end of July for office buildings in Tokyo’s five wards declined 23 basis points MoM to 4.89%, marking the first time the level has been below 5% since January 2009. A 5% vacancy rate is regarded to be the starting point for acceleration in rent rises. When investors regain confidence regarding the economic outlook, economic sensitive undervalued sectors such as banks, real estate and trading companies should start to show a remarkable performance. Better business results for the April- June quarter and shareholder friendly announcements, which we are currently seeing, should be an additional positive factor for the market to enter new territory.

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 also maintain high weightings 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 10/08/15 and are based on internal research and modelling.