BY YUTAKA UDA
In February the Japanese market showed a rise across the board especially towards the end of the month. This was due to 1) recovery in the Japanese economy, 2) brisk performance in the US market, 3) risk lowering in Europe and oil producing countries as the debt issue progressed and the oil price showed some rise and 4) a rise in JGB yield.
The Nikkei 225 closed the month at 18,797.9 (up 6.4% MoM) and the TOPIX at 1,523.9 (up 7.7% MoM). This solid rise also came from expectations in the buying of Japanese equities from pension funds. Proprietary trading recorded net purchases in excess of JPY 1 trillion, the highest level since 2010.
In terms of sector performance, of the 33 TSE sectors, 30 appreciated. The best five performers were miscellaneous finance, banks, securities, steel, and metal products. The worst five performers were air transportation, utilities, rubber, fishery & agriculture, and textiles.
At the beginning of the month, the market declined from a disappointing real GDP number for Oct-Dec in the US, but recovered quickly as oil prices started to rise and it seemed that risk on the market started to come back, bonds were sold off and 10yr JGB bond yields also started to creep up. The rise in yield triggered sectors such as miscellaneous finances, banks and securities. In the latter part of the month, Japanese equities continued to rally and the Nikkei 225 closed above 18,000 on 16th February for the first time since 2008, it then rose towards the end of the month to the highest level since 2000.
The yen started the month from 117.49 against the USD and depreciated towards 119.61 by the end of February.
The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 27 February 2015 went up 9.6% compared with that of 30 January, while the TOPIX rose 7.7% during the same period. The fund put no new names into the portfolio with no stocks sold out.
The Japanese economy started to recover from 4Q 2014. Real GDP growth for 4Q 2014 grew 1.5% QoQ annualised, 0.7 points lower than the preliminary number of 2.2%, the revision downward was entirely due to inventory adjustment. Real final demands (GDP-inventory) increased 2.4% QoQ annualised. Industrial production in January 2015 rose 4.0% MoM with shipment up 5.8% MoM and inventory down 0.6% MoM. The government survey suggests that industrial production in February would rise 0.2% MoM and decline 3.2% MoM in March meaning industrial production in 1Q 2015 will accelerate to 3.4% QoQ from the 1.7% rise in 4Q 2014. The economy watchers survey is also encouraging with its future conditions diffusion index (DI) expanding sharply in February to 53.2 from its recent bottom of 44.0 in November 2014. Although inflation is currently decelerating, mainly due to lower oil prices, pay rise negotiations for FY2015 is becoming more favourable for workers. With labour markets tightening continuously and corporate profits expanding sharply, it is expected that monthly salary increases in April will be 2.5-3.0%, the highest since 1997. It should give a strong positive impact on personal consumption, housing investment and capital expenditure.
From the middle of 2015 CPI may accelerate, reflecting an anticipated economic expansion and oil price recovery. We expect that the 10 year bond yield will rise to 0.8% towards the end of 2015 despite the BoJ’s continuous operation, and the stock market should show a remarkable rally with the Nikkei 225 going over 22,000 by the end of 2015. Economic sensitive and Abenomics related domestic oriented stocks will lead the market. In particular, banks should be best positioned to enjoy significant rises since profits will expand substantially because of lending volume growth as well as the recovery of lending margins and so should be inclined to strengthen shareholders return.
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 13/03/15 and are based on internal research and modelling.