PM Kishida’s ‘new capitalism’ should enhance Japan’s potential

Market Development: In early November, the Japanese market surged following the results of the Lower House election that took place on 31st October, in which the LDP won a higher number of seats.

Fund Commentary
16 Dec 2021

Market Development: In early November, the Japanese market surged following the results of the Lower House election that took place on 31st October, in which the LDP won a higher number of seats.

Whilst the US market hit a record high on the 8th November due to a rally led by strong earnings on tech names, the Japanese market stagnated as the full-year guidance of corporate profits for FY2021 was below consensus, even though the Q2 results were solid. Appreciation of the JPY against the US Dollar was also a drag on the market.

In mid-November, markets gained on the back of expectations following the outline of the economic policy plan, now it has been confirmed by Kishida’s administration. On the 16th of November, the Nikkei average was close to 30,000, but subsequent profit taking resulted in a downturn from then on.

In late November, the market declined sharply as the US Treasury yield increased and concerns arose surrounding the discovery of the new Omicron variant in South Africa.

The TOPIX closed the month at 1,928.4 (down 3.6% MoM) and the Nikkei 225 at 27,821.8 (down 3.7% MoM). 31 out of 33 sectors fell. The top five performers were Electrical Equipment, Precision Instruments, Metal Products, Information & Communication and Mining.

The bottom five performers were Air Transportation, Steel, Fishery, Agriculture & Forestry, Marine Transportation and Real Estate.

The 10-year JGB yield opened at 0.099 and rose above 0.121 on the first day of November as the Fed decided to begin tapering, but the yield declined when the Fed chairman showed a cautious stance on rate hikes. In late November, the yield declined further on the back of concerns for the Omicron virus and economic slowdown, ending the month at 0.057.

The JPY against the USD began at 113.95, depreciated to over 115.5 at one point, before appreciating in late November as the risk-averse mood took hold following concerns over the Omicron variant, ending the month at 113.17.

The crude oil price started at 83.57 but quickly declined when the economic downturn from the Omicron variant became a concern and ended the month at 66.18.

Outlook

After the economic activity was stagnant in Q3 2021 with GDP growth of -3.6% QoQ annualised, the Japanese economy began a sound recovery from October 2021 onwards. This was partly due to the nationwide lifting of the state of emergency from the beginning of October.

Industrial production in October rose 1.1% MoM, the first increase in four months. The government estimates that industrial production will rise 9.0% MoM in November, and a further 2.1% MoM in December.

The outlook for corporate profits is encouraging. According to a report published by Nomura on 3rd December, recurring profits of RN large stocks for H1 2021 increased sharply by 86.4% YoY. They estimate recurring profits for FY2021 will rise 32.3% YoY, much higher than companies forecast. They expect that recurring profits for FY2022 will increase a further 10.3% YoY, exceeding the previous peak by 23.7%, before the pandemic in FY2018.

The Japanese government announced a decisive economic stimulus package on 19th November, with the largest fiscal spending in history of JPY55.7t, of which JPY31.6t would be legalised in the form of the FY2021 supplementary budget during December 2021.

This reflects Prime Minister Kishida’s strong will to revive the economy by any means. The government estimates that these measures will lift Japan’s economy by approximately 5.6%.

Mr Kishida appears to be more serious than previous leaders regarding fiscal stimulus. In the past, there have been numerous occasions where large amounts of cash remained unspent against big budgets.

This is one of the main reasons why the Japanese economy was so stagnant. We believe Mr Kishida’s top priority will be how to strengthen the Japanese economy. Japan has significant assets in the government; corporations and individuals.

The question is how to utilise these assets efficiently. We suspect that Mr Kishida is of the opinion that fiscal consolidation needs to be discussed at a later stage, after we have strengthened the economy – which is the only way Japan can discuss, compete and survive in a difficult international situation, where geopolitical tensions worsen and global climate changes are becoming a more imminent issue.

We hope and believe that Mr Kishida’s ‘new capitalism’ will be successful, with Japan regaining its strong position in the international economy over the next 5 to 10 years, resembling the 1980’s. We expect the Japanese market to show its best performance among major markets during the coming few years, with economic sensitive stocks leading the rally.

Portfolio Development

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese Yen basis as of 30 November 2021 declined 6.7% compared with that of 29th October.

The Fund added two new names to the portfolio (Toyo Engineering and Komatsu), with two stocks sold out (Fujitsu and Tokyo Steel). 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 on 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 13/12/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.