Market Development: During September, the Japanese stock market continued to rise slightly with the TOPIX up 0.5% MoM and the Nikkei 225 up 0.2% MoM. At the same time the major US stock indices fell for the first time in six months. The NASDAQ reached an all-time high of 12,056 on 2nd September, before declining for three consecutive weeks, entering into correction territory with a drop of just over 10%. By comparison, the Japanese markets were solid.
Expectations for the development of a Covid-19 vaccine and economic recoveries at home and abroad supported the markets. On 10th September, the Tokyo Metropolitan Government lowered its coronavirus alert level, and on 14th September, Mr. Yoshihide Suga won the election convincingly, succeeding Abe as the head of the LDP, with the support of the major political factions. On 16th September, the Suga administration was established. He is expected to maintain the previous government’s economic policies. Prioritising the reopening of the economy, Prime Minister Suga eased event restrictions and, in order for those travelling to and from Tokyo to be eligible for the Go-To-Travel campaign subsidy, allowed travel to and from the capital.
On 30th September, the Japanese stock markets declined suddenly, with US stock futures falling sharply in reaction to the view that Joe Biden had come out ahead in the first presidential debate on 29th September. Small cap indices such as the TOPIX Small (up 4.9% MoM) and the JASDAQ index (up 3.3% MoM), which are less affected by conditions overseas, outperformed the TOPIX, and the TSE Mothers index reached a new YTD high (up 9.4% MoM).
Of the TSE’s 33 sectors, 16 sectors gained during the month. The best five performers were Marine Transportation, Precision Instruments, Services, Miscellaneous Manufacturing and Metal Products, while the bottom five performers were Mining, Oil, Air Transportation, Insurance and Securities.
The Japanese economy is recovering steadily. Industrial production during August rose 1.7% MoM, exceeding the market forecast of +1.4% MoM, with shipments up 2.1% MoM and inventories down 1.4% MoM. The government expects industrial production to increase 5.7% MoM in September and a further 2.9% MoM in October.
Retail sales in August rose 4.6% MoM on a seasonally adjusted basis. Machine tool orders, a leading indicator for CapEx, began to show a remarkable recovery. Machine tool orders for September were JPY84.1 billion which is the highest since December 2019 on a monthly basis, and 64.2% higher than the low of JPY51.2 billion in May, but -15% YoY. Notably, orders from abroad recorded their first YoY increase in two years. Domestic orders are expected to catch up to exports fairly soon judging from the recent production trend in the automobile industry.
In the Economy Watchers Survey of Business, the overall current conditions DI for September rose sharply by 5.4 points from August to 49.3, well above the pre Covid-19 level. The outlook DI for the economy for the next two to three months also improved significantly, 5.9 points MoM, as expectations of the benefits from the government’s Go-To-Travel campaign are heightened.
Recovering economic activities are also filtering down to basic industries. On 7th October, the Ministry of Economy, Trade and Industry (METI) announced its forecast that crude steel production in Japan for the Oct-Dec quarter would increase 2.2 million tons (up 12%) QoQ to 21.1 million tons, resulting in 82.2 million tons for CY2020, higher than Nippon Steel’s (5401) suggestion of below 80 million tons.
Meanwhile, we believe operating profits for the steel industry should show a sharp upturn from the large deficits seen in the first half of FY2020 (Apr-Mar) to some profits in the second half of FY2020. According to Nomura, valuations of the steel sector are very cheap with PBR 0.44x against the TOPIX average of 1.28x as of the end of FY2019. Should infrastructure spending increase worldwide (which we believe it will) for the coming years, basic industries such as the steel sector should attract investor’s interest.
We continue to be very bullish on the Japanese stock market for the medium term, although we could see some volatility following the US Presidential election in the short term.
The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese Yen basis as of 30 September 2020 declined 0.2% compared with that of 31 August whilst the TOPIX went up 0.5% during the same period. The Fund added no new names to the portfolio with no stocks sold out.
The Fund continues to be overweight in economically sensitive sectors with cheap valuations such as Trading Companies, Construction, Real Estate and Banking, 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 Fund as of 14/10/2020 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.