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Fund Commentary
21 Dec 2016


In November, the market’s attention was focused on the US presidential election. Up until the point that the result was announced, the market was volatile, swaying in response to various predictions. Once Trump was elected, the US market advanced and long term rates worldwide rose on expectations of a robust economy as a result of larger fiscal spending and tax reductions. The Japanese market followed suit and advanced as the US dollar strengthened sharply against the Yen.

At the beginning of the month, uncertainty prevailed ahead of the election and the market adopted a risk-averse stance. The yen appreciated as a consequence and the Japanese market declined. As the election result drew nearer on 9th November, the Japanese market closed the day with a decline of 4.6%. However, once the US market rallied after the Japanese market had closed, investors were reassured and the Japanese market posted its largest daily gain YTD of 5.8% the following day. As US long term rates rose, so did Japanese rates and as a consequence, along with expectations for the abolition of the Dodd-Frank Act, financials advanced substantially. The TOPIX advanced for 12 consecutive days, more than the Nikkei 225, as financials and exporters are more heavily weighted in the TOPIX. Domestic macro numbers continued to be positive MoM, especially retail which recovered after bad weather in October. On 30th November, OPEC agreed to cut oil production for the first time in 8 years, triggering a rise in crude oil prices and the wider market.

The TOPIX closed the month at 1,469.4 (up 5.5% MoM) and the Nikkei 225 at 18,308.5 (up 5.1% MoM).

In terms of sector performance, 28 sectors among the 33 sectors gained. The best five performers were insurance, banks, steel, securities and real estate. The worst five performers were foods, pharmaceuticals, communication, textiles, and fishery & agriculture.

The Yen began the month at 104.82 against the US dollar and continued to depreciate towards 114.46 at month end. The yield on 10-year JGBs opened at -0.05% but rose into positive territory by middle of the month, following US treasury yields, and ended the month at 0.02%.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 30 November 2016 went up 11.0% compared with that of 28 October, while the TOPIX rose 5.5% during the same period. The Fund put no new names into the portfolio with no stocks sold out.

There are plenty of signs that the Japanese economy is returning to strong growth. Retail sales in October increased 1.3% MoM in real terms, the job offers to applicants ratio in October increased from 1.38x in September to 1.40x, the highest since August 1991. Industrial production is continuing its strong upward momentum into 4Q 2016; it rose 0.1% MoM in October with shipments up 2.2% MoM and inventory down 2.1% MoM, after the solid expansion of 1.3% QoQ in 3Q. The government forecasts that industrial production in November will rise 4.5% MoM and decline 0.6% MoM in December. This would represent a rise of 3.8% QoQ in 4Q. A huge economic stimulus package and the approval of the supplementary budget for FY2016 in the Diet on 11 October are starting to contribute to economic expansion and a recovery of business and consumer sentiment. Corporate profits may show a sharp turnaround from 2H of FY2016. According to Nomura, recurring profits in the Russell/Nomura large cap index for 1H of FY2016 declined 12.6% YoY, better than the previous estimate for a decline of 16.5% YoY. Nomura estimates that recurring profits for 2H of FY2016 on the same basis will recover substantially to 16.9% YoY with the assumption of the USD/JPY at 103. Judging by the current yen level of 110-115, it is very likely that corporate profits will be revised sharply upwards.

After Trump’s victory in the US presidential election, the global economic environment is going to change dramatically. Mr. Trump wants to bring US economic growth up from 2% over the past several years to 3.5% by utilizing all available policy tools such as infrastructure spending, tax cuts and deregulation. Trump and his team should recognise that fair trade is important, and an antiglobalism agenda would damage the world and US economy. The Investment Adviser hopes that the outcome on defence and trade policy will be more pragmatic and less fearful. We should now recognise that the world economy is targeting higher growth, led by the US economy, and a paradigm shift from deflation to inflation and a great rotation from bonds into equities is inevitably taking place. The Japanese stock market, which was hurt the most by deflation among major markets, should record the most remarkable recovery. The Nikkei 225 could rise significantly to a level in the 27,000-28,000 range within two years. Banks and other economic sensitive stocks should lead the rally.

The Fund is increasing its allocation to the machinery and IT service sectors with the conviction that capex will expand significantly as the labour shortage is getting serious and capacity constraints are emerging. Cyclical sectors such as steel and nonferrous metals are also targeted for higher exposure. The Fund retains a very positive stance towards banks and trading companies, while defensive sectors such as foods, pharmaceuticals and utilities are avoided.


The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Fund as of 12/12/16 and are based on internal research and modelling.