Japanese stock market more resilient to currency fluctuations


Fund Commentary
4 Sep 2017


In July, the Japanese stock market initially rallied due to a weaker yen against the background of differing monetary policies in Japan and the US. The market however later stagnated due to the strengthening of the yen and political uncertainty in these markets. The Nikkei 225 closed the month at 19,925.2 (down 0.5% MoM) and the TOPIX at 1,618.6 (up 0.4% MoM).

The market started the month strongly thanks to a significant improvement in the economic conditions shown in the BoJ’s “Tankan” survey on 3rd July and strong US employment data reported on 7th July. The US dollar appreciated to over 114 against the yen on 11th July, the highest in the past two months. In her testimony to Congress on 12th July, FRB chair Janet Yellen’s comments were however interpreted as dovish, while the Trump administration remained in disarray, dampening prospects for tax cuts and infrastructure investment, together leading to lower long-term interest rates and a weaker US dollar.

The TOPIX reached a high of 1,633.0 on 20th July, before tailing off towards the end of the month. A decline of the Abe administration’s public approval rating to below 30% also dampened investor’s sentiment temporarily. The yen started the month at 112.4 against the US dollar and appreciated throughout the month to close at 110.3.

In terms of sector performance, 14 out of the TSE 33 sectors gained. The five best performers were steel, non-ferrous metal, textiles, electricals and transportation equipment, while the worst five performers were banks, pulp & paper, rubber, land transportation and real estate.

The Japanese stock market has been becoming more resilient to currency fluctuations. From the end of December 2016 to the end of July 2017, the yen appreciated from 117.0 to 110.3 against the US dollar, while the TOPIX rose 6.6% over the same time period.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 31 July 2017 rose 0.3% compared with that of 30 June, while the TOPIX went up 0.4% during the same period. The Fund put no new names into the portfolio with no stocks sold out.

The Japanese economy itself is on course for a sound recovery. According to a report by the Ministry of Economy, Trade and Industry industrial production rose 1.6% MoM in June, with shipment rising 2.3% MoM and inventory declining 2.2% MoM. The government estimates that industrial production in July would rise 0.8% MoM and further increase 3.6% MoM in August. The labour market is continuing to tighten with the job offers to applicants ratio in June rising to 1.51x and the unemployment rate declining to 2.8%. According to the Financial Times the ratio for regular workers reached 1.01x in June for the first time since records began in 2004. This suggests that labour shortages are spreading beyond part-time staff to regular, salaried employees, implying wage growth.

Prime Minister Abe reshuffled his cabinet on 3rd August, commenting “I have gathered a wide range of personnel to ensure the new cabinet can focus on getting our job done. In a nutshell, this is a result-oriented cabinet. The top priority policy is to revitalize the economy and to get out from deflation completely.” It is said that he chose political veterans with proven track records rather than popular, fresh politicians. Mr. Abe appointed Mr. Motegi as the Minister of State for Economic and Fiscal Policy. Previously, Mr. Motegi had been LDP policy chief and had worked as economy, trade and industry minister. We regard this appointment as a clear and strong message from Mr. Abe and an indication of his commitment to regain a strong economy.

With respect to corporate profits, we have seen lots of encouraging reports. According to the Nikkei Newspaper from 5th August, 57% of listed companies announced that net profits (excluding financials) expanded sharply 43.3% YoY in the April-June quarter. Companies’ estimates for the FY 2017 remain very conservative, with net profits growing 9.3% YoY. We believe this estimate should be revised up sharply month by month, and quarter by quarter. If Mr. Abe is determined to implement an additional stimulus package, which is fairly likely, business and consumer sentiment would improve. This would contribute to the 2% GDP growth target and the stock market should show a rally towards the end of 2017, with economic sensitive stocks leading the rally.

The Fund is increasing its allocation to the machinery and IT service sectors, with the conviction that capex will expand significantly due to the more serious labour shortage and potential capacity constraints. Cyclical sectors such as steel, nonferrous metals, and chemicals together with energy 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 07/08/17 and are based on internal research and modelling.