G-20 to use all available policy tools for solid and sustainable growth


Fund Commentary
14 Sep 2016


In August, the Japanese market rose as a result of the weakening Yen towards the end of the month after Fed Chair Yellen raised expectations for an early rate hike during her Jackson Hole speech.

At the start of the month, the market declined and the Yen appreciated against the US dollar as a result of the decline in crude oil prices and uncertainty around the global market. Although the Cabinet approved the government’s JPY 28.1 trillion stimulus package on the 2nd, the market did not react as the stimulus was unchanged from what was previously reported. However, the market did rebound on the 4th when the BoJ announced that it had increased ETF purchases from JPY 34.7 billion to JPY 70.7 billion. US and European markets also gained when the Bank of England cut its policy rate and decided to expand quantitative easing, however the Japanese market lost momentum when the Yen appreciated as a result. When US employment data exceeded market expectations, the Japanese market also reacted positively led by undervalued financials. From mid-month, thin trading persisted and the market stagnated as the Yen gradually appreciated. However, expectation of an early US rate hike increased after Fed Chair Yellen’s speech at the Jackson Hole Economic Symposium, resulting in the Japanese market rallying towards the end of month as the Yen quickly weakened against the US dollar.

The TOPIX closed the month at 1,329.5 (up 0.5% MoM) and the Nikkei 225 at 16,887.4 (up 1.9% MoM).

In terms of sector performance, 18 sectors among 33 sectors gained. The best five performers were steel, mining, banking, non-ferrous metals and transportation equipment. The worst five performers were fishery & agriculture, pharmaceuticals, land transportation, construction and foods.

The Yen started the month at 102.06 against the US dollar. At one point, the Yen appreciated close to 99, but depreciated towards the end of month and ended at 103.43.

The yield on 10-year JGBs opened the month at -0.195. Yields on government bonds declined in Europe and the US when the Bank of England cut its key rate for the first time in more than 7 years. JGBs were also bought across the board. However, from mid-month onwards, the yield on 10-year JGBs gradually rose again and ended the month at -0.07.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 31 August 2016 went up 0.6% compared with that of 29 July, while the TOPIX rose 0.5% during the same period. The Fund put no new names into the portfolio with no stocks sold out.

The G-20 meeting was held in Hangzhou, China on 4-5 September, where leaders of the G-20 countries agreed that all available policy tools – including monetary, fiscal and structural reforms – should be used to achieve solid and sustainable economic growth. While they made clear an opposition to protectionism and advocated free trade and globalization, they discussed overcapacity in steel and other industries. The G-20 leaders agreed to set up a global forum to monitor the process of cutting overcapacity. According to some newspapers, Xi Jinping, the Chinese President, called on G-20 members to match their words with actions when he said “we should turn the G-20 group into an action team, instead of a talking shop”. Xi’s comment implies that China is ready to take decisive action on further monetary easing, fiscal stimulus and structural reforms.

In Japan, an extraordinary session in the Diet will start on 26 September where an economic stimulus package of JPY 28.1 trillion will be legalised and put into practice. According to Nomura, recurring profits in 1Q FY2016 for the Russell/Nomura Large Cap (ex. financials) index declined 16.7% YoY due to stagnant global economic conditions, temporary impacts from the Kumamoto Earthquake and the strong Yen. But, Nomura estimates that recurring profits for FY2016 will be able to reach a positive growth of 0.9% YoY since the profits for 2H FY2016 may have a chance of increasing to 24.9% YoY partly due to base effect. Industrial production in July was unchanged MoM with shipments up 0.9% MoM and inventory down 2.4% MoM. The government forecasts that industrial production in August will rise 4.1% MoM and it will decline 0.7% MoM in September. Therefore on a quarterly basis, industrial production should recover sharply with 3.2% in July-September after poor activity in previous quarters (0.2% up in April-June and 1.0% down in January-March). If JPY/USD stabilizes in the range 105±5, which the Investment Adviser thinks is likely, the Japanese stock market should show a remarkable recovery with economically sensitive stocks leading the rally. The sizable fiscal stimulus should be a strong spring board for sharp economic expansion.

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. A dramatic expansion of inbound tourists towards the 2020 Tokyo Olympics should contribute to the real estate and construction sectors. The Fund retains a positive stance on 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 12/09/16 and are based on internal research and modelling.