Changes in the semiconductor industry?

Market Development: In July, the market began with a decline on the back of concerns over inflation and declining spending momentum in the US. That said, the market recovered as the US long-term rate declined, and confidence increased when the minutes of the FOMC meeting did not show an aggressive stance on further monetary tightening. On 8th July the Japanese market lost steam following a tragedy, the former Prime Minister Abe was shot and killed during the Upper House election campaign.

Fund Commentary
16 Aug 2022

Market Development: In July, the market began with a decline on the back of concerns over inflation and declining spending momentum in the US. That said, the market recovered as the US long-term rate declined, and confidence increased when the minutes of the FOMC meeting did not show an aggressive stance on further monetary tightening. On 8th July the Japanese market lost steam following a tragedy, the former Prime Minister Abe was shot and killed during the Upper House election campaign.

In mid-July, the Japanese market rallied following a major victory by the LDP in the Upper House election and the JPY against the US Dollar depreciated to close to 140. The rally in the US market caused by a declining long-term rate also supported the Japanese market.

In late July, the Bank of Japan’s (BoJ) decision to continue monetary easing, despite a rate hike in the US, Europe and other Asian countries, such as Korea and China, supported the market. The Q1 results of Japanese companies, released in late July, were positive and exceeded consensus. That said, the appreciation in the JPY hurt the market towards month end.

In July, the TOPIX closed the month at 1,940.3 (up 3.7% MoM) and the Nikkei 225 at 27,801.6 (up 5.3% MoM). 28 out of 33 sectors gained with economic-sensitive stocks performing well.

The top five performers were Marine Transportation, Services, Precision Instruments, Metal Products and Electrical Equipment. The bottom five performers were Insurance, Utilities, Air Transportation, Pulp & Paper and Textiles.

The 10-year JGB yield opened the month at 0.23 and at one point hit over 0.25, before declining after the BoJ’s decision to maintain monetary easing on the 21st, ending the month at 0.185. The JPY against the US Dollar began at 135.7 and depreciated to over 139 at one point, but then appreciated quickly as the US long-term rate declined, ending the month at 133.3. The crude oil price started at 105.8 and ended the month at 98.6.

Outlook

The Japanese economy remains rather patchy. Industrial production in June rebounded strongly, by 8.9% MoM compared to May at -7.5% MoM, significantly better than the market consensus of +4.2% MoM. The government estimated that industrial production would increase by 3.8% MoM in July, and a further 6.0% MoM in August. On the other hand, retail sales in June declined 1.4% MoM, turning downward for the first time since February.

According to the Economy Watchers Survey of Business, announced on 8th August, the overall current conditions DI for July worsened by a sharp -9.1 points from June. This likely reflects the rapid increase in new COVID cases in July. In particular, the household-related DI worsened by -10.8 points, MoM. The overall outlook DI declined to 42.8 from 47.6 the previous month.

That said, the recent weakness of the JPY against the USD has begun to have a clearly positive impact on corporate CapEx plans. The Nikkei survey in June suggests that 876 large companies covering all industries would increase capital expenditure in FY2022 by 25% YoY. It is an amazing number in the current uncertain environment. On 9th August, machine tool orders, a leading indicator for CapEx, were reported to have risen 5.5% YoY in July, out of which domestic demand increased 14.5% YoY.

On a political front, Mr Shinzo Abe, Japan’s longest-serving prime minister, was shot dead on 8th July during a campaign speech for the Upper House election. Japan was deeply shocked by the assassination as: firstly, we lost a great asset; and secondly, we are forced to recognise that Japanese security measures are vulnerable to violence, despite global perception.

Following Prime Minister Kishida’s victory in the Upper House election, he is expected to reshuffle his cabinet in August, with the aim of rebuilding the strength of Japan on both economic and societal fronts.

It is expected that Mr Kishida will announce an additional economic stimulus package in September or October. It should be a positive for the economy and the market, but we need to check whether the package would be implemented in line with the plans of the new cabinet members, as large amounts of budget have been left unspent over the past several years.

Following the downward revision of net sales by Micron Technology, NVIDIA lowered their net sales sharply for the May-July period from $8.1 billion to $6.7 billion. As we have predicted in our previous commentaries, negative reports have started appearing on the future expectations of the semiconductor industry.

Portfolio Development

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese Yen basis as of 29th July 2022 rose 2.5% compared with that of 30th June. The Fund added one new name (J Front Retailing) to the portfolio with one stock (Sumitomo Chemical) sold out.

The Fund continues to be overweight in economically sensitive sectors with cheap valuations such as Trading Companies, Marine Transportation, Banking and Steel, while defensive sectors such as Foods, Pharmaceuticals and Utilities, along with IT-related sectors, such as Electricals, Precision Instruments and Communications, remain underweight.

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 10/08/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.