Economic stimulus to be focused more on fiscal policy


Fund Commentary
16 Mar 2016


The Japanese market again fell sharply in February due to rapid movements in Forex and long-term yields in JGBs. In one month, the JPY appreciated against US dollar from 121.14 to 112.69, and at one point was lower than 111. The yield on 10 year JGBs opened at 0.095% and closed at -0.065% hitting -0.075% at one point.

At the beginning of the month, the market rose significantly as the JPY weakened versus the US dollar after the BoJ announced the adoption of negative interest rates on 29th January. However, the decline in crude oil prices drove investors to purchase US treasuries, which led to declines in the US long-term rate and subsequently the JPY appreciated versus the US dollar. This caused concerns over the earnings of Japanese companies, especially exporters, and the market declined. Furthermore, long-term interest rates fell to an all-time low due to the adoption of negative interest rates and concerns arose over the earnings of financials. The US Congress testimony given by Fed Chair Yellen on the 11th February, led to speculation of a slowdown in the pace of rate hikes in the US, which prompted the JPY to strengthen at one point to below 111 against US dollar. The price of WTI crude oil futures also dropped on the same day to below $30/bbl. As a result, the following day the Japanese market fell to its
lowest level since October 2014, with the TOPIX below 1,200 and the Nikkei 225 below 15,000. However, when Deutsche Bank announced a bond buyback plan, and sought to provide reassurance on the creditworthiness of financial institutions, the market regained confidence the following week. The JPY weakened after the G20 meetings but concerns about a global economic slowdown remained. In late February, the Japanese market was affected by movements in US stocks, crude oil prices and Forex and the Nikkei 225 traded in a range around 16,000.

The TOPIX closed the month at 1,297.9 (down 9.4% MoM) and the Nikkei 225 at 16,026.8 (down 8.5% MoM). All 33 TSE sectors declined. The best performing sectors were communication, pharmaceuticals, electricals, utilities, and oil. The worst performing sectors were mining, glass and ceramics, banks, securities, and transportation equipment. 

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 29 February 2016 went down 10.0% compared with that of 29 January, while the TOPIX declined 9.4% during the same period. The Fund put one new name (SCSK) into the portfolio with no stocks sold out.

On 26-27 February, the G20 meeting was held in Shanghai, where finance ministers and central bankers declared clearly “We will use all policy tools – monetary, fiscal and structural – individually and collectively to achieve strong growth. Monetary policies will continue to support economic activity and ensure price stability, consistent with central banks’ mandates, but monetary policy alone cannot lead to balanced growth. Our fiscal strategies aim to support the economy and we will use fiscal policy flexibly to strengthen growth, job creation and confidence …. Faster progress on structural reforms should bolster potential growth in the medium term.” Although some European members are reported to be skeptical on the possibility of coordinated action, it looks increasingly likely that financial leaders are putting more emphasis on fiscal policy than monetary policy.

China has announced full commitment to utilise all policy tools. On 29th February, PBoC decided to cut the bank reserve requirement by 0.5 percentage points. On 5 March, when the National People’s Congress started, the Chinese government unveiled its five year plan (2016-2020) to target GDP growth of 6.5-7.0% by expanding infrastructure investments in transportation networks such as roads and railways, and implementing structural reforms such as a reduction in overcapacity in industries such as steel and cement. This policy should contribute towards the stability of commodity prices such as oil, copper, iron ore etc. 

Economic data in Japan is sending mixed signals at present. Industrial production in January rose 3.7% MoM, higher than market consensus of a 3.2% MoM rise. The government estimates that it will decline 5.2% MoM in February and rise 3.1% MoM in
March. The labour market is continuing to tighten with the job offers to applicants ratio rising to 1.28x in January, the highest since December 1991. The BoJ may take further action on QQE within a few months, and the government should also announce
a sizable fiscal policy in 2Q to ensure the recovery of domestic demand is on track. The negative interest rate policy instigated by the BoJ should start to contribute to economic expansion significantly from 2Q, accompanied by additional QQE and fiscal stimulus. Market attention should start to be focused on economically sensitive domestic sectors and resource related stocks.

Construction and real estate sectors are expected to show another strong rally with replacement demands expanding sharply and the 2020 Tokyo Olympics related projects starting. The Fund is increasing its allocation to the machinery and IT service sectors 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 hardware 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 10/03/16 and are based on internal research and modelling.