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deMarket Development: In early September, selling led the Japanese market as concerns heightened over the economic slowdown brought on by high inflation and further monetary tightening. When the Fed made a dovish comment on 7th September, the market rebounded in the US and the Japanese market followed.
In mid-September, the market declined sharply on the back of news that the US CPI was higher than market expectations. The CPI (ex-food) for August in Japan was up 2.8% YoY which was the largest growth since 1991 (excluding the impact of consumption tax hikes). Inbound-related names rallied as expectations arose regarding a relaxation of Japan’s border controls to be implemented in October.
In late September, the market declined as a risk-off mood overcame the market, anticipating the global economic downturn. The Bank of Japan (BoJ) decided to maintain its monetary easing policy, amid the US and EU raising interest rates; and the Yen reached the weakest level against the Dollar in 24 years. The BoJ intervened in the currency market by buying JPY against USD for the first time in 24 years when the Yen neared the 146 level.
In September, the TOPIX closed the month at 1,835.9 (down 6.5% MoM) and the Nikkei 225 at 25,937.2 (down 7.7% MoM). 30 out of 33 sectors declined. The top five performers were Land Transportation, Air Transportation, Pharmaceuticals, Retail and Food. The bottom five performers were Marine Transportation, Mining, Oil, Transportation Equipment and Electricals.
The 10-year JGB yield began at 0.226, at one point shot up beyond 0.32, but lowered again after the BoJ decided to maintain the monetary easing policy and ended the month at 0.244.
The JPY against the USD opened at 138.96 and depreciated further as the rate gap between the US and Japan widened. At one point it reached close to 146, but following the currency intervention by the BoJ, it settled below 145 and closed the month at 144.74.
The Crude oil price started at 89.55 and continued to decline from the risk of an economic downturn, ending the month at 79.49.
Outlook
The Japanese economy remains stable. Industrial production in August rose by 2.7% MoM, much better than the market forecast of +0.2%; and the production index returned to the highest level since September 2019. The government estimated that industrial production in September would increase a further 2.9% MoM, followed by a further rise of 3.2% MoM in October. Retail sales in August rose by 1.4% MoM, well above the market forecast of +0.4%.
According to the BoJ’s September “Tankan” (short-term economic survey), the CapEx plan at large companies for FY2022 was revised up further, to a 21.5% YoY increase from 18.6% YoY at the June survey, the highest level since records began in 1983. This likely reflects the pent-up demand caused by a blackout of projects during the pandemic; anticipated demand to counter the labour shortage in expectation of the economy reopening; and a possible change in the behaviour of corporations on the back of the Yen’s weakening trend.
After the Fed decided to raise the FF rate by 75bp on 22nd September, it is widely expected that the rate will be raised by a further 75bp in November, followed by an additional 50bp rise in December. The US midterm elections will be held on 8th November.
Corporate profits for Q3 in the US will be reported throughout October and November and are expected to show rather disappointing results, particularly in the IT and Semiconductor sectors. That said, the US market may continue to show a negative tone until early November.
The Japanese market may be stagnant over the short term, influenced by the US market; but the extent of the damage to the Japanese market should be less, in comparison to other major markets. The bottom of the USD-JPY appeared to be in sight around the 146-148 mark as the BoJ made a currency intervention at the 146 level on 22nd September; although they may be forced to intervene again.
Kishida’s government is expected to announce a comprehensive economic stimulus package in October; including further relaxation on international immigration regulations for inbound tourists. Japan actually reopened its borders to foreign tourists on 11th October, almost completely.
A sharp increase in inbound spending is anticipated, which should have a significant impact on the economy and could be the trigger for the Yen to stop weakening, encouraging foreign investors to increase investment in Japan. The TOPIX could even recover to over the 2,000 level by the end of 2022 (1,854.6 as of 13th October). The market leaders should be inbound-related domestic sectors and infrastructure investment-related sectors.
Portfolio Development
The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese Yen basis as of 30th September 2022 declined by 7.4% compared with that of 31st August. The Fund added one new name to the portfolio (Mizuho Financial Group), with no stocks 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, and 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 Fund as of 13/10/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.