Infrastructure investment in the USA expected to expand soon

The Japanese market gained in the first half of June on the back of strong economic data in the US and a depreciating yen. Later in the month, the risk-off sentiment prevailed as concerns about US-China trade frictions rose, triggering a decline of the Japanese market (similar to other markets).

Fund Commentary
24 Jul 2018

The Japanese market gained in the first half of June on the back of strong economic data in the US and a depreciating yen. Later in the month, the risk-off sentiment prevailed as concerns about US-China trade frictions rose, triggering a decline of the Japanese market (similar to other markets).

In early June, US employment data was announced and above expectations, triggering a rise in the Japanese market, alongside the US equity market. On the back of strong economic data, the Fed was expected to raise interest rates, leading the yen to depreciate and supporting the market further.

In mid-June, the market gained reassurance, with the US-North Korea summit taking place on the 12th of June. This said, the wait-and-see stance remained prevalent prior to the BoJ, Fed, and ECB monetary policy meetings taking place. On the 18th of June, concerns regarding trade frictions between the US and China intensified. As a result, the market declined.

During the month, the OPEC agreement in relation to reducing trimming was in line with expectations, bringing relief to resource-related names. The crude oil price rose towards the end of the month, surpassing 74$/bbl on the 29th. At the same time, the depreciation of the yen supported the Japanese market to some extent.

Figures such as April core domestic private sector machinery orders (excluding ships and electric power), were strong and gained +10.1% MoM, the highest since June 2008.

The TOPIX closed the month at 1,730.9 (down 0.95% MoM), with the Nikkei 225 finishing at 22,304.5 (up 0.46% MoM). In terms of sector performance, 9 out of 33 sectors gained. Throughout the month, foreign demand-oriented names declined but resource-related names were bought following the rise in crude oil prices. The best five performers were oil, fishery, pharmaceuticals, services, and foods, whereas the worst five performers were other products, air transportation, metal products, mining, and marine transportation.

The yen started the month at 108.82 but soon after depreciated following strong US employment data. Until mid-June, the yen moved within the range of mid-109 to mid- 110. The ECB Board of Governors decided on the 14th, that they will end the net asset purchase program by the end of 2018, with the BoJ being the only major central bank that will maintain monetary easing. The yen depreciated on the back of this news, ending the month at 110.76.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 29 June 2018 declined 2.1% compared with that of 31 May, while the TOPIX lost 1% during the same period. The Fund put no new names into the portfolio with one stock (GS Yuasa) sold out.

Most recent economic data continues to indicate that the Japanese economy is on the course for a sound recovery. After industrial production initially declined 0.2% MoM in May, the first MoM decline in four months, the government estimates that it will rise 0.4% MoM in June followed by a further increase of 0.8% MoM in July. In May, the unemployment ratio fell by 0.3 percentage points MoM, down to 2.2%, constituting the lowest level since October 1992. At the same time the job offers to applicants ratio rose to 1.60x, the highest since January 1974.

This said, business sentiment is slightly deteriorating, influenced by trade frictions between the US and other major nations. According to the BoJ’s quarterly economic survey “Tankan”, the diffusion index (DI) for large manufacturers recorded the second consecutive QoQ decline down to 21 in June, still depicting a high level despite the drop. Notably, car makers reported a sharp drop from 22 (in March) to 15 (in June) against the backdrop of US-led protectionism potentially impacting the sector. The survey further states that the FY2018 capex for all companies (in all industries) would increase 7.9% YoY, depicting a sharp upward revision from the March survey (-0.7% YoY), acknowledging the need for a higher productivity in an environment characterised by an increased labour shortage. The forecasted rise of +7.9% YoY is the highest for a June “Tankan” since comparable records began in 1983.

Mr. Richard Koo, chief economist at Nomura Research Institute, cited a report by the White House stating that, “the US is seeing a significant uptick in infrastructure investment as a result of President Trump’s regulatory reforms. […] In an executive order dated 15 August 2017, President Trump ordered that the federal approval and authorization process for infrastructure projects, which takes an average of 4.6 years and in some cases more than 10 years, be shortened to two years or less. Moreover, each project is to be assigned a lead agency that will be responsible for carrying the approval process through to completion. […] As President Trump’s regulatory reform was announced more than ten months ago, some results are already being felt in some regions as work starts on approved projects. […] this has also helped to boost support for the Trump administration.”

It is therefore expected that infrastructure investments should help boosting the US economy further, impacting oil and other energyrelated product prices. When trade frictions become less serious, which the Investment Adviser hopes to be soon, the market should regain strong momentum once again.

The Fund is increasing its allocation to energy-related sectors such as oil and trading companies together with cyclical sectors such as steel, non-ferrous metals and chemicals, since infrastructure demand should support or lift global economic growth. The Fund retains a positive stance towards banks and machinery stocks, while defensive sectors such as foods, pharmaceuticals and utilities continue to be avoided.

The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Funds as of 06/07/18 and are based on internal research and modelling.