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deMarket Development: In early October, buying predominated the Japanese market as concerns eased over further monetary tightening in the US, on the back of a lower-than-expected US ISM Manufacturing Index.
In mid-October, the Japanese market followed the US market with higher volatility. The market declined as fears returned over US monetary tightening when brisk numbers were announced for the US labour market. After higher-than-expected US CPI figures were released, the Japanese market rebounded, again following the US market.
In late October, the Japanese market swayed from the macro environment, but brisk results releases for individual stocks supported the market gains. On the 21st, the yield on the US 10-Yr Treasury rose to its highest level since 2008, and the JPY against the USD weakened close to 152, the weakest level since 1990, prompting the BoJ and Japanese government to operate a Yen-buying intervention.
Japan’s core CPI (which excludes fresh food) was announced as 3% YoY for September, the highest level in 31 years. Furthermore, the cabinet approved a JPY 29 Tr stimulus package to combat inflation.
In October, the TOPIX closed the month at 1,929.4 (up 5.1% MoM), and the Nikkei 225 at 27,587.5 (up 6.4% MoM). 29 out of 33 sectors gained. The top five performers were Rubber, Mining, Marine Transportation, Transport Equipment and Electricals. The bottom five performers were Pulp & Paper, Foods, Fishery & Agriculture, Utilities and Glass & Ceramic Products.
The 10 Yr JGB yield began at 0.244 and was quite stable considering that the US long-term yield rose rapidly to 4.335 at one point, ending the month at 0.248. The JPY against the USD opened at 144.74, and at one point depreciated to 151.95 as the rate gap between the US and Japan widened. Following the currency intervention by the BoJ, it settled towards 145 and closed the month at 148.71. The Crude oil price began at 79.49, rose to 93.64 at one point, but settled at 86.53 at the end of the month.
Market Outlook
The Japanese economy is getting into better shape as a whole; although inflation has been creeping up. Industrial production in September declined 1.6% MoM, the first MoM decline since May 2022. This was a reactive decline after strong catch-up production pushed output up by almost 14% through August, from a bottom in May when production was heavily impacted by China’s zero-COVID policy.
Meanwhile, industrial production rose sharply by 5.9% QoQ in July-Sep. The government estimated that industrial production would decline 0.4% MoM in October and rise 0.8% MoM in November. Sound momentum in retail sales continued in September, up 1.1% MoM, making three consecutive MoM increases.
According to October’s Economy Watchers Survey announced on 9th November, the household-related DI improved by 2.6 points MoM to 51.4, the third consecutive MoM rise. The service-related DI and the eating / drinking DI improved sharply by 6.5 and 4.3 points respectively, with the return of international tourists following the lifting of border controls and the beginning of government support for domestic travel in October.
On the 28th of October, Kishida’s government announced a comprehensive economic stimulus package with direct government spending of JPY 29 Tr, 5% of GDP, including further relaxation of border controls for inbound tourists.
A sharp increase in inbound spending is firmly anticipated. As we have said before, this should have a significant impact on the economy and could be a trigger for the Yen to stop weakening, encouraging foreign investors to increase investment in Japanese securities and properties. The current level of the Yen’s weakness should incentivise corporations to increase domestic CapEx in Japan.
As higher interest rates continue, the US and European economies may be forced to slow down significantly for more than a year. We are convinced that the main driver of global economic growth for the coming years will shift from IT investment to infrastructure investment, where inflation should be higher for the next 5-10 years, than the previous 15-20 years.
The Japanese market is well positioned, with a higher weighting towards Industrials and less exposure to IT sectors. The Japanese market could be the best performer among major markets for the next few years.
Portfolio Strategy
The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese Yen basis as of 28th October 2022 rose 3.4% compared with that of 30th September. The Fund added no new names to the portfolio and no stocks were sold out.
The Fund continues to be overweight in economically sensitive sectors with cheap valuations such as Trading Companies, Banking and Steel, while defensive sectors such as Foods, Pharmaceuticals and Utilities; in addition to IT-related sectors, such as Electricals and Communications, continue to be underweighted.
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 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 Funds as of 15/11/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.