Infrastructure investment to lead world economic growth


Fund Commentary
10 Mar 2017


In February, the Nikkei JASDAQ posted 13 consecutive days of gains up until the last day of February, and set a new record high, similar to the Dow Jones in the US which gained on 12 consecutive days setting a new record high on the 27th February. On the other hand, the Nikkei 225 and TOPIX were range bound and capped by the appreciation of the yen.

In early February, the Japanese market suffered from appreciation of the yen as the US treasury rate fell. Following President Trump’s comments on corporate tax cuts on 9th February, expectations arose for economic expansion and higher corporate earnings. The yen depreciated and the Japanese market rallied, following the US. On 10th February, a Japan-US summit was held and as fears of Trump criticizing Japanese monetary policy and trading faded, the Japanese market gained in confidence. Japanese companies’ earnings results were positive overall and economic data such as capex and net exports were up MoM. Also, inbound tourists in January showed solid numbers partly due to the earlier Lunar New Year holiday calendar. In late February, the US long rate lowered again before Trump’s first address to the Congress on 28th February. The yen appreciated below 112 against the US dollar and profit taking occurred in Japanese equities towards the end of the month.

The TOPIX closed the month at 1,535.3 (up 0.9% MoM) and the Nikkei 225 at 19,119.0 (up 0.4% MoM). In terms of sector performance, 27 out of 33 sectors gained. The best five performers were rubber, marine transportation, non-ferrous metals, pulp & paper and pharmaceuticals. The worst five performers were communication, transportation equipment, real estate, construction and land transportation.

The yen started the month at 112.8 against the US dollar and appreciated early in the month towards 111.74 as the US long rate lowered. However, with US rate hike expectations, the yen depreciated at one point to 114.48 but appreciated again and ended the month at 112.77. The yield on 10-year JGBs opened at 0.085% but a lowering trend occurred, encouraged by the BoJ’s bond buying. Also, political uncertainty in Europe and the falling US rate prompted JGB buying and pushed the rate down towards 0.05% by the end of the month.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 28th February 2017 went up 1.4% compared with that of 31st January, while the TOPIX rose 0.9% during the same period. The Fund put no new names into the portfolio with no stocks sold out.

In February 2017, the Asian Development Bank (ADB) announced that Asia needs to invest USD26 trillion over 15 years by 2030 to resolve an infrastructure shortage based on a survey of 45 countries in the region. Total annual spending needs for infrastructure such as power, roads, railways and so on is calculated to be about USD1.7 trillion, which is more than double the annual spending of USD750 billion for the period 2010-2020 that ADB estimated in 2009.

On 28th February, President Trump made his first speech to Congress, asking them to approve legislation for an investment of USD1 trillion on infrastructure in the United States. On 5th March, at the National People’s Congress, China disclosed its economic plan for 2017. Although they lowered the GDP growth target from 6.7% in 2016 to 6.5% in 2017, they increased the growth of fixed asset investment to 9.0% in 2017 from 7.9% in 2016 with the recognition that infrastructure investment is essential for sustainable growth. They also committed to make progress on structural reforms; specifically on steel production capacity which will be cut by a further 50 million tons in 2017 following the cut of 65 million tons in 2016 and on coal capacity which is to be cut by 150 million tons in 2017 on top of the cut of 290 million tons in 2016. These developments strongly suggest that infrastructure investment will lead world economic expansion from 2017 onwards with inflation creeping up globally.

In Japan, the economy is on course for a sound recovery, although industrial production is patchy on a monthly basis. Labour conditions continue to tighten with the jobless ratio declining to 3.0% in January from 3.1% in December 2016, and nationwide core CPI (excl. fresh foods) in January rising 0.1% YoY, the first positive growth in the past 13 months. Against this backdrop, Yamato Holdings, which has the largest market share of around 50% in the parcel delivery service industry, reported on the Nikkei that it will be increasing its basic fee structure on its service by September 2017, the first rise in the past 27 years, and also re-examining its service system due to a lack of drivers. We think that the deflation phase in Japan is clearly over, and the portfolio should prepare for a significant shift in the investment environment.

The Fund is increasing its allocation to the machinery and IT service sectors with the conviction that capex will expand significantly as the labour shortage is getting serious and capacity constraints are emerging. Cyclical sectors such as steel and nonferrous metals are also targeted for higher exposure. The Fund retains a very 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 10/03/17 and are based on internal research and modelling.