Japanese economy on course for a sound recovery


Fund Commentary
16 Feb 2015


During January the Japanese market continued the trend from the end of 2014 and, due to concerns over economic conditions in Europe, fell sharply in the first half of the month. In addition, the prospect for global deflation rose as oil prices showed a sharp decline that brought with it negative momentum. However, speculation and decision for the ECB’s quantitative easing prompted buying. At the end of the month, positive domestic economic data and brisk company earnings brought the Japanese equity market back into positive figures MoM. The Nikkei 225 closed the month at 17,674.4 (up 1.3% MoM) and the TOPIX at 1,415.1 (up 0.5% MoM).

In terms of sector performance, of the 33 TSE sectors, 16 appreciated. The best five performers were pharmaceuticals, rubber, air transportation, land transportation, and marine transportation. The worst five performers were miscellaneous finance, securities, real estate, commerce and oil.

At the beginning of the month, Japanese markets continued to decline due to concerns over Greek political conditions and resource producing countries that would suffer from a sharp decline in oil prices. However, the decline stopped and rallied after the ECB announced its decision on quantitative easing. When Syriza, the coalition of radical left parties, won a major victory in the Greek general election, concerns retreated and pushed the stock market further. In Japan, positive domestic indicators came out and stocks with good earnings results reacted positively.

The yen started the month from 119.78 against the USD and appreciated towards 116.17 on 15th January when the market became risk averse, but settled at 117.49 by the end of January. The Euro depreciated from 144.9 yen to 132.66 yen during the month.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese Yen basis as of 30 January 2015 went down 3.3% compared with that of 31 December 2014, while the TOPIX rose 0.5% during the same period. The Fund put no new names into the portfolio with no stocks sold out.

The Japanese economy is on course for a sound recovery from 4Q 2014 onwards. Industrial production in December increased 1.0% MoM with shipment up 1.1% MoM and inventory down 0.4% MoM. Household spending increased 0.4% MoM, the fourth consecutive monthly increase. The Labour market was tightening further with the jobless ratio down to 3.4% and the job offers to applicant’s ratio up to 1.15 times, the highest since 1992. The government survey suggested that industrial production in January would increase 6.3% MoM and decline 1.8% MoM in February. GDP data for 4Q (October-December) 2014 will be released on 16 February and should be an encouraging number with more than 3% real growth QoQ annualised. Investors will gradually regain confidence on the outlook for the Japanese economy. Active managers, particularly foreign investors, may start to come back to the market aggressively which should strongly impact on the market and domestic oriented stocks, with cheap valuations, should lead the rally. From the middle of 2014 until January 2015, when the Japanese economy was stagnant because of the consumption tax hike and bad weather conditions, passive funds, particularly the BoJ and the GPIF were big buyers and largely influenced small stocks. Export oriented and defensive stocks have outperformed the index massively. Valuation factors did not work with expensive stocks continuing to rise, and cheap stocks becoming even cheaper but a significant change is now happening as Bond markets have been very strong, helped by the continuous, heavy buying of the BoJ with 10 years JGB yield coming down to 0.195% on 20 January but the yield shot up suddenly to 0.395% on 4 February, even though the BoJ kept the same operation. On 6 February the GPIF announced that they had appointed three new managers for the Japanese equity funds with the intention to raise the weighting of active funds out of the total Japanese equity funds. We thought the JPY/USD had already bottomed out at 122 in December 2014, but this is expected to move in a range of 115-120 for a few months before going to 110 towards the end of 2015. A dramatic change on market characteristics is expected soon.

Construction and real estate sectors should have more upside potential with replacement demands expanding sharply and the 2020 Tokyo Olympics related projects starting. The Fund is increasing allocation to the machinery sector with the conviction that capex will have to grow to seek higher productivity. The Fund will keep a high weighting in banks and commerce (mainly trading companies) sectors. On the other hand, defensive and technology sectors should be avoided as these have high valuations and lower growth potential.

The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Fund as of 13/02/15 and are based on internal research and modelling.