Get ready for the next economic stimulus package

Market Development: In early August, the Japanese market was swayed by the US market and didn’t gain much, despite better-than-expected Q1 corporate profit results.

Fund Commentary
21 Sep 2022

Market Development: In early August, the Japanese market was swayed by the US market and didn’t gain much, despite better-than-expected Q1 corporate profit results.

In mid-August, the Japanese market rallied, following the US market, as concerns over inflation and the risk of rate hikes eased. At one point, the Nikkei 225 closed above 29,000 for the first time since January.

In late August, the market pulled back as Fed chair Jerome Powell showed a hawkish stance and the risk of economic slowdown rose again. The JPY against the USD depreciated further as the Bank of Japan maintained its monetary easing policy.

In August, the TOPIX closed the month at 1,963.2 (up 1.2% MoM) and the Nikkei 225 at 28,091.5 (up 1.0% MoM). 25 out of the 33 sectors gained. Air Transportation performed well, as the government eased restrictions on the number of travellers entering Japan. Economic sensitive stocks also outperformed amid high resource prices.

The best five performers were Air Transportation, Wholesale, Mining, Non-Ferrous Metals and Steel. The bottom five performers were Other Products, Real Estate, Services, Information & Communication and Miscellaneous Financing.

The 10Yr JGB yield opened at 0.185, dropped to 0.164 at one point, but then rose again, closing at 0.226 as the US long-term yield gained.

The JPY against the USD began at 133.27 and depreciated as the rate gap between the US and Japan widened. At one point it hit over 139 and closed at 138.96. The crude oil price started at 98.62 and ended the month at 89.55.

Outlook

The Japanese economy is fairly stable. The real GDP growth for Q2 (Apr-Jun) 2022 was revised up to +3.5% QoQ annualised from +2.2%, better than the market forecast of +2.9%. Notably, CapEx was very strong with an 8.3% rise in QoQ annualised.

This should reflect the pent-up demand that could not be realised during the pandemic; digitalisation demand to counter the labour shortage, which may be reignited with Japan’s economic reopening; and decarbonisation-related demand. Recently, the JPY’s weakness against the USD may have started to have a positive impact on corporations’ behaviour.

Industrial production in July increased by 1.0% MoM, better than the market forecast of -0.5% MoM. The government estimated that industrial production in August would rise by 5.5% MoM, followed by a further rise of 0.8% MoM in September.

There was a significant divergence between industries. The Auto industry increased its production by 12.0% MoM in July, following a sharp decline in May, mainly due to China-related supply constraints. On the other hand, production of electronic parts and devices declined 9.2% MoM in July.

Extra demands from remote working began to disappear. Supply and demand conditions have been worsening, as production capacities in the Semiconductor industry are increasing further.

For the global market, the biggest risk is how long and severe the Ukraine crisis will be, which is impacting energy and other commodity prices.

The most realistic risk is likely to be how far US interest rates will rise – we believe the 10Yr bond yield may rise above 4%. US economic growth should be forced to come down to nearly zero for some time, implying a significant contraction of equity valuations, particularly in the IT and Semiconductor sectors. The possible damage this may cause the Japanese market should be much smaller compared to other major markets.

In October the Japanese government is expected to announce a comprehensive economic stimulus package, including further relaxation of international immigration regulations for inbound tourists. That could be the trigger for the JPY to stop weakening and encourage foreign investors to increase investment in Japan.

Portfolio Development

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese Yen basis as of 31st August 2022 went up 3.2% compared with that of 29th July, whilst the TOPIX TR Index rose 1.2% during the same period. The Fund added no new names into the portfolio with one stock (JFE Holdings) sold out.

The Fund continues to be overweight in economically sensitive sectors with cheap valuations such as Trading Companies, Banking, Steel and Marine Transportation, while defensive sectors such as Foods, Pharmaceuticals and Utilities, along with IT-related sectors such as Electricals, Precision Instruments and Communications remain underweight.

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

_

The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Fund as of 13/09/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.