Important global political events to be a trigger for another sharp rally


Fund Commentary
23 Oct 2017


​In September, the Japanese stock market returned a solid performance. Early in the month, the market pulled back following increasing concerns and negative reactions regarding the risk posed by North Korea, but later surged again following the strength of the US dollar, rising hopes regarding the general election and the announcement of a tax reform plan in the US. The Nikkei 225 closed the month at 20,356.3, up 3.6% MoM, while the TOPIX ended the month at 1,674.8, up 3.6% MoM.

Concerns about geopolitical risks increased on 3 September, when North Korea announced that it had successfully tested a hydrogen bomb that could be carried by an intercontinental ballistic missile. The 10-year US Treasury yield dropped to 2.04% on 7 September. One day later, the US dollar declined to 107.8 against the yen, triggering a decline of the Nikkei 225 to the month’s low of 19,274.8. Since then, the market regained a strong momentum as geopolitical risks eased from 9 September, the anniversary of the founding of North Korea, due to a lack of provocative actions from the country.

On 18 September, the Nikkei newspaper and other media reported that Prime Minister Abe was considering dissolving the Lower House and calling a snap election. On 19 September (18 September being a national holiday), the Nikkei 225 increased by 389 points to 20,299.4, reaching a new YTD high. At the same time, the TSE 1 market cap reached a new record. Later in the month, certain media outlets reported that Mr. Abe was planning a JPY 2 trillion economic stimulus package by the end of 2017.

The market overall remained optimistic through to the end of the month as the US dollar recovered against the yen following announcements by the Trump administration of the implementation of a major tax reform. The US dollar reached a 112.5 level against the yen at the end of the month. The 10-year JGB yield opened the month at 0.01% and closed at 0.07%, while the US dollar started the month against the yen at 110.0, ending at 112.5.

In terms of sector performance, 29 out of the TSE 33 sectors gained. The five best performers were mining, oil, rubber, miscellaneous manufacturing and transport equipment, while the five worst performers were utilities, telecommunications, steel, foods and fishery & agriculture.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 29 September 2017 increased 5.1% compared with that of 31 August, while the TOPIX rose 3.6% during the same period. The Fund put no new name into the portfolio with no stocks sold out.

The economic trend in Japan has been improving for some time. Industrial production rose 2.1% MoM in August, whereas inventories declined 0.6% MoM. The government estimates that industrial production will decline 1.9% MoM in September, followed by an increase of 3.5% MoM in October. Nationwide core CPI (excluding fresh food) rose 0.7% YoY in August, surpassing the previous month’s level (up 0.5% YoY).

According to the BoJ’s quarterly economic survey “Tankan”, the diffusion index (DI) for all industries and large companies increased to 23 in September, largely exceeding the previous estimate of 16. Current outlooks for the DI are however lower, standing at 19.

In the past few quarters, results tended to always be better than previous outlooks, while outlooks were worse than current conditions. This implies that companies’ management recognises the continuous improvement of the business environment, but at the same time they continue to take a cautious stance in terms of business outlook due to factors such as geopolitical risks, currency movements, US economic policy and domestic uncertainties.

In October, there will be a number of very important political events globally. In Japan, the Lower House election will be held on 22 October. In this regard, Tokyo’s Governor Yuriko Koike stepped forward as leader of the new party “Party of Hope”, immediately cooling the LDP’s celebratory mood. It is likely that Mr. Abe’s LDP will lose some seats; however, the LDP combined with its coalition party (Komeito) is still likely to keep the majority of 465 seats.

In China, the 19th Communist Party Congress convenes on 18 October, marking the beginning of Mr. Xi’s second five year term as Party General Secretary. Mr. Xi is expected to gain greater power in the party. Rumour has it that after the Congress he may be able to take an even tougher stance on sanctions regarding North Korea, which may help to resolve some uncertainty surrounding North Korea.

In the US, Trump’s tax reform plan is likely to be discussed in the Congress and may show some progress. From late October to mid November a large number of companies will report corporate profit results for Q2 of FY2017, which are expected to be much better than previous estimates. Judging from the above mentioned factors, the Japanese stock market should start to show a rally from late October towards year end.

The Fund is increasing its allocation to the machinery and IT service sectors with the conviction that capex will expand due to the increasingly serious labour shortages and potential capacity constraints. Cyclical sectors such as steel, nonferrous metals, and chemical together with energy are also targeted for higher exposure. The Fund retains a positive stance towards 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 06/10/17 and are based on internal research and modelling