The Japanese equity market rebounded in January after deteriorating sharply the previous month. Trade tensions between the US and China have not eased but President Trump’s domineering manner has, due to Nancy Pelosi, the Speaker of the US House of Representatives. The market has been supported on the back of no further bad news and stable currency markets. The dollar did weaken sharply to 104 on one occasion, but bounced back to 109 afterwards.
The Nidec Corporation, a world leading manufacturer of small precision motors mainly used in HDD and optical disk drives, announced a sizeable downward revision of earnings for FY2018. Although it was a surprise and a sizeable revision, investors remained calm and the share price of Nidec climbed afterwards.
The talks between Prime Minister Abe and President Putin achieved little. The Japanese market increased sharply along with the US markets, backed by the announcement by the US Fed that
interest rate rises are on hold.
Anritsu (6754) manufactures measurement instruments for telecommunication system manufacturers and device vendors. Their products are heavily related to 5G investments throughout the world. Anritsu announced a sizeable upward revision of earnings in January and its share price soared as a result. P/E 38x, PBR 3.6x, ROE 9.6%.
The Japanese equity market seems to have regained its sense of urgency to move forward, but it is lacking the traction of 2017 and 2018. The negative impact from the US and China trade dispute on Japanese corporate earnings is larger than the Investment Adviser expected. Earnings of domestic companies may recover in the January to March period compared to the deterioration of the last quarter when the dispute escalated aggressively.
The Investment Adviser believes that the EPS of the TOPIX index, which represents a broad range of the Japanese market, could deteriorate to single digits this year. Due to the recent market decline, the P/E of the TOPIX index is around 13x based on current consensus earnings estimates, but it is not yet enough to attract global investors. Although global investors may not be attracted by the low valuation of the market, the Investment Adviser is able to search for potential growth companies selectively. There are companies that have the ability to grow regardless of the macro or external environment, and the Team aim to select such growth companies for inclusion in the portfolio.
The views and statements contained herein are those of Rheos Capital Works Inc in their capacity as Investment Adviser to the Fund as of 14/02/19 and are based on internal research and modelling.