January started with a dip in the Japanese market caused by a downgrade in Apple’s sales guidance and the release of worse manufacturing data for December in both the US and China. This said, US jobs data, released on 4th January, exceeded market consensus. On the same day, the People’s Bank of China announced that it would implement economic stimulus measures, whilst the Fed’s Chairman Powell indicated a termination of the US rate hike.
Following this news, the US market gained substantially, with the Japanese market rallying for 3 consecutive days. In mid-January, Japanese companies announced cuts in forecasts associated with weakening demand for semiconductors and a decrease in Chinese demand. This said, expectations regarding progress being made in the US-China trade dispute outweighed, pushing the market higher.
On 15th January, China’s policy makers announced substantial tax cuts, leading China and Capex-related names to rally in Japan. The market struggled to take a clear direction in late January, following the resurfacing uncertainty around the US-China trade dispute, and persisting concerns over a global economic slowdown.
On 30th January, the Federal Open Market Committee indicated that the central bank will be patient in raising interest rates and would show some flexibility with regards to reducing its balance sheet. The Japanese market surged on the back of this news, with economic sensitive names being bought.
The TOPIX closed the month at 1,567.5 (up 4.9% MoM), while the Nikkei 225 finished at 20,773.5 (up 3.8% MoM).
In terms of sector performance, 32 of the 33 sectors gained, with the five best performers being glass and ceramics, pulp and paper, machinery, real estate and marine transportation. The five worst performers were retail, foods, chemicals, rubber, and air transportation.
The yield on 10-year JGBs opened the month at 0.003% and dropped to almost -0.05% on the 4th January following the decrease in the US 10 year treasury yield, which stemmed from a risk-off market, concerned about a global economic slowdown. The JGBs yield gained but kept at a low level due to the Fed’s dovish stance, ending the month at 0.005%.
The Yen started the month at 109.69 against the US Dollar and appreciated to 104 on the 3rd, after Chinese and US data releases indicated an economic slowdown. This said, the Yen depreciated when favourable US employment data was announced. The possibility of a pause in interest rate rises in the US kept the Dollar low, which at the same time led to a higher Yen, ending the month at 108.89.
The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 31st January 2019 gained 7.7% compared with that of 28th December 2018, while the TOPIX rose 4.9% during the same period. The Fund put no new names into the portfolio, with no stocks sold out.
According to financial market consensus the global economy is weakening faster than expected. On 21st January, the IMF revised its 2018 growth forecast for the global economy from 3.9% down to 3.7% and from 3.7% down to 3.5% in 2019 due to trade wars and financial market volatility. China’s GDP growth dropped from 6.8% YoY in 2017 to 6.6% YoY in 2018, the lowest since 1990, but still above the 6.5% set out by the government in early 2018. China is trying to support its economy by utilising various policy measures such as financial easing, tax cuts, infrastructure spending and consumption subsidies, targeting 6.0-6.5% GDP growth in 2019.
In Japan, the government passed the second supplementary budget for FY2019 in the Diet on 7th February, with JPY 1.1 trillion out of JPY 2.7 trillion allocated to public works spending. The government proposed an aggressive budget plan for FY2019, with JPY 101.5 trillion (up 3.8% YoY) allocated to secure sound growth in FY2019, trying to offset the potentially negative impact from the consumption tax hike scheduled for the 1st October 2019. The budget is very likely to be legalised by the end of March 2019. The Investment Adviser believes that the public works spending will lead the economic expansion in Japan for FY2019 and FY2020.
Corporate profits are deteriorating somewhat, with Nomura’s large cap stocks (303 companies excl. financials) showing a 2.7% YoY decline in operating profits for Q3 2018, following an increase of +4.8% YoY in Q2 and +11.3% YoY in Q1. Global markets are watching the developments of the US-China trade talks and the progress regarding another US government shut down.
The Investment Adviser hopes that the US President Donald Trump and China’s President Xi Jinping will be able to find some meaningful solutions by 1st March 2019 as they will both recognise that they eventually need to share economic and strategic responsibilities for the world. Once these issues are safely resolved, the Japanese economy has the opportunity to regain strong momentum on the back of the government’s fiscal stimulus, with corporate profits entering a recovery phase. The team strongly believe that the Japanese stock market should recover in 2019, with the Nikkei 225 superseding the 25,000 level by year end.
Against the backdrop of Japan’s vulnerability against natural disasters and anticipated fiscal spending, the team are increasing the Fund’s exposure to the construction and real estate sector. The Fund continues to be overweight with regards to economic sensitive sectors such as energy, trading companies, banking and machinery stocks. At the same time, defensive sectors such as foods, pharmaceuticals and utilities continue to be avoided.
Going forward, the team will reduce the number of stocks from current levels of around 40 stocks to approximately 30 over the next couple of months, concentrating the portfolio and including higher conviction stocks, similar to the strategy implemented in 2003.
The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Funds as of 07/02/2019 and are based on internal research and modelling.