Japanese economy to begin a sharp recovery

Market Development: The Japanese market declined in early October, continuing the trend from late September. The TOPIX fell for nine consecutive trading days until 7th October. This was in part due to domestic concerns over the Kishida policy and partly from external concerns such as the credit risk of China’s Evergrande Group, the US debt ceiling crisis and the rise in US long-term interest rates.

Monthly Fund Commentary
18 Nov 2021

Market Development: The Japanese market declined in early October, continuing the trend from late September. The TOPIX fell for nine consecutive trading days until 7th October. This was in part due to domestic concerns over the Kishida policy and partly from external concerns such as the credit risk of China’s Evergrande Group, the US debt ceiling crisis and the rise in US long-term interest rates.

In mid-October, the market recovered on the back of the weakening yen to the US Dollar and the drop in the number of new COVID cases in Tokyo, which have steadily declined to below 100. Gains in the US market following a pause in the rise of US long-term rates also supported the market.

In late October, the market fluctuated on the back of the news flow of Q2 results and the general election, which took place on the 31st of October. The TOPIX closed the month at 2,001.2 (down 1.4% MoM) and the Nikkei 225 at 28,892.7 (down 1.9% MoM). 23 out of 33 sectors declined.

The top five performing sectors were Mining, Non-Ferrous Metals, Glass & Ceramic Products, Oil and Other Financing Business. The bottom five performers were Air Transportation, Utilities, Land Transportation, Retail and Rubber.

The 10 Yr JGB yield began at 0.07 and steadily rose beyond 0.1 by late October on the back of the rise in yields in the US and Europe, ending the month at 0.099. The JPY against the USD started at 111.29 and depreciated to almost 115 on the 20th of October, as the USD strengthened from a higher US 10 Yr treasury yield (which hit over 1.7), but settled at the end of the month at 113.95. The crude oil price opened at 75.03 and continued to rise – reaching over 85 at one point for the first time in 7 years – before closing at 83.57.

Outlook

Under the State of Emergency (SoE), the Japanese economy remained stagnant up to Q3 2021. Industrial production declined 5.4% MoM in September, much lower than the market consensus of -2.8% MoM, recording 3 consecutive months of MoM decline.

Notably, the Auto sector saw a particularly steep decline (-28.2% MoM), heavily impacted by the global semiconductor shortage and stalled component supply from Asian countries affected by the delta variant. That said, the government estimates that industrial production would increase 6.4% MoM in October, and rise a further 5.7% MoM in November. Although auto production remains somewhat unclear, we expect that overall production activity could return to normal and recover sharply from Q4, as infections quickly decline and vaccinations rapidly increase.

According to the Economy Watcher’s Survey of Business announced on 9th November, the overall current conditions DI for October improved by 13.4 points to 55.5. This should mirror the sudden restart of economic activity, with the lifting of the SoE at the end of September, and the sharp decline in new COVID-19 cases.

On 5th November, US Congress finally passed President Biden’s infrastructure bill for $1 trillion. This should have a substantial impact on US economic growth and contribute to a rapid improvement in productivity in the US economy.

In addition, it should also stimulate economic policies for many other nations. We believe that the driving force for global economic growth for the coming few years will shift from IT investment to infrastructure investment, which should dramatically change the characteristics of global markets.

Following the sound victory of the LDP coalition in the general election on 31st October, Prime Minister Kishida is expected to announce a sizeable economic stimulus package of JPY 30 trillion in November, which should be centred on effective fiscal stimulus. We expect the Japanese economy to regain substantial momentum from Q4 2021, towards the end of 2022.

From a long-term view, world exhibitions in 2025 and Integrated Resort projects (including casinos) in 2027-2028 should bring Japan’s economic growth back to over 2% p.a. for the coming 5 years. We believe that the Japanese stock market will perform remarkably, with the TOPIX targeting 2,500 towards the end of 2023.

Portfolio Development

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese Yen basis as of 29th October 2021 declined 0.8% compared with that of 30th September, whilst the TOPIX TR Index went down 1.4% during the same period. The Fund added no new names to the portfolio and no stocks were sold out.

The Fund continues to be overweight in economically sensitive sectors with cheap valuations such as Trading Companies, Marine Transportation, Iron & Steel and Banking, while defensive sectors such as Foods, Pharmaceuticals, Retail and Utilities continue to be avoided. The Fund takes a cautious stance toward IT-related sectors.

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 TurbervilleAdam 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 12/11/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.