The Nikkei 225 Index closed the month at 16,173.5 (up 4.9% MoM) and the TOPIX Index at 1,326.3 (up 3.8% MoM). In terms of sector performance, of the 33 TSE sectors, 28 appreciated in September. The best five performers were transportation equipment, machinery, electricals, insurance, and utilities. The worst five performers were marine transportation, oil, pulp & paper, services, and fishery & agriculture.
In the earlier part of the month, the Japanese market rallied, following US and European markets higher. Expectations towards further stimulus by the Bank of Japan (BoJ) and the government, after a cabinet reshuffle, also boosted the market. However, some domestic economic numbers were weak and a more cautious view gained the upper hand.
The yen depreciated by in excess of 5% in the month (from 104.09 compared to the USD, to 109.65), driven by the European Central Bank’s announcement of further monetary easing and also the Fed’s comment on the need for higher than expected rates. This currency move acted as a catalyst for the Japanese equity market, with export oriented stocks being the major beneficiary.
In the latter half of the month, weak numbers from China together with heightened geopolitical risk prompted equities to decline from their earlier peaks.
The net asset value per share for the Nippon Growth (UCITS) Fund rose 2.4% during the period of 29 August to 30 September 2014, while the TOPIX Index increased by 3.8% during the same period. The Fund put one new name (Nabtesco) into the portfolio with one stock (Ube Industries) sold out.
The Japanese economy has been a little disappointing in the past few months. The negative impact caused by a hike in consumption tax was expected although many bearish economists and commentators wanted to interpret the weak economic data in the summer as a result of the tax hike.
Industrial activity and consumption were very badly affected by unusually severe typhoons and long, heavy rains from June to August. Public works have also been delayed by bad weather conditions and labour shortages. Industrial production in August declined 1.5% MoM, much worse than the previous estimate of +1.3% MoM, but the government survey suggests that industrial production in September should increase sharply by 6.0% MoM as the weather returned to normal conditions during September.
The labour market is continuing to improve with the jobless ratio in August declining to 3.5% from 3.8% in July. Cash earnings per head in August increased 1.4% YoY, showing a steady up-trend partly because of an accelerating shift of workforce from part time to permanent employment.
The BoJ’s September “Tankan” survey was not so impressive; with the future Diffusion Index (DI) for December almost unchanged from the September DI for both manufacturing and nonmanufacturing. However, capital expenditure (Capex) plans in large companies for FY2014 was revised up to +8.6% YoY from a previous estimate of +7.4% YoY.
Although current economic conditions remain stagnant (mainly due to weather conditions), commentators have noted that order backlogs in machinery and construction sectors have increased, with labour conditions also getting tighter. Should weather conditions return to normal in the fourth quarter, there could be a huge leap in domestic demand growth, resulting in a sharp improvement in corporate profitability for the period.
The Japanese yen briefly traded at 110 vs the USD in early October. At these levels, many exporting companies are already competitive and should be tempted to increase domestic production. Domestic oriented economic sensitive sectors, which were badly affected performance-wise in recent months, should also have a good opportunity to rally from current levels.The Government’s decision regarding the asset allocation of its $1.2tn public pension fund (potentially switching some of its bond exposure into equities); further monetary easing; and a fiscal stimulus package are all likely to be announced towards the end of this year. It is anticipated that these announcements will have a significant impact on the future direction of the market.
The Fund will continue to have a large exposure to the commerce (trading companies), construction and the real estate sectors, while defensive sectors will remain underweight. The Fund will also continue to increase exposure to the banking sector.
Commentary provided by Evarich Asset Management in their Capacity as Investment Advisers to the Fund as of 09 October 2014