Paradigm shift from deflation to inflation worldwide


Fund Commentary
18 Nov 2016


In October, thin trading continued as the market waited for the presidential election in the US. However, the market adopted a risk-on stance as 1) US, UK and Chinese economic numbers were better than expected, 2) crude oil prices stabilised, and 3) the yen weakened against the US dollar.

At the start of the month, buying dominated as concerns over Deutsche Bank eased. Additionally, once positive US economic indicators were announced, expectations for a rate hike before the end of 2016 re-emerged which caused the yen to depreciate against the dollar. Crude oil prices also rose and risk appetite recovered worldwide. During mid-October, the market continued to gain as Clinton took the lead in the presidential race and as risk faded for resource oriented countries. Although the Chinese trade balance was weak, GDP data was solid, easing concerns over the Chinese economy. On the 28th October, the UK’s GDP proved to be better than the market’s forecast and long yields rose worldwide, triggering the Yen to depreciate beyond 105 against the dollar. Simultaneously, first half results started to be announced in Japan which, overall, exceeded the market’s forecast and the Japanese market gained further. Most domestic economic numbers showed improvements MoM except for retail data which was hindered by bad weather.

The TOPIX closed the month at 1,393.0 (up 5.3% MoM) and the Nikkei 225 at 17,425.0 (up 5.9% MoM).

In terms of sector performance, 32 sectors among 33 sectors gained. The best five performers were securities, fishery & agriculture, insurance, metal products and marine transportation. The worst five performers were pharmaceuticals, services, steel, foods and other products.

The yen started the month at 101.35 against the US dollar and depreciated towards 105.29 but settled at 104.82 at the end of month.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 28 October 2016 went up 6.8% compared with that of 30 September, while the TOPIX rose 5.3% during the same period. The Fund put no new names into the portfolio with no stocks sold out.

The Japanese economy is on course for a sound recovery. Industrial production in September was unchanged MoM, but shipments increased 1.1% MoM with inventory down 0.4% MoM. Thus industrial production in 3Q (July-September) increased 1.1% QoQ, better than the previous quarters (1Q -1.0% QoQ, 2Q +0.2% QoQ). The government estimates that industrial production in October will rise 1.1% MoM and increase a further 2.1% MoM in November. The Supplementary budget for FY2016, as part of an economic stimulus package of 28.1 trillion yen, was legalised in the Diet on 11th October, which should contribute towards boosting economic activity strongly from 4Q onwards. When the news on the US presidential election came in on 9th November that Republican candidate Donald Trump had secured victory, financial markets were thrown into disarray with the Nikkei 225 nose-diving by 5.4% and the yen briefly surging to 101 against US dollar. However, the following day, Japanese markets regained confidence with the Nikkei rising to 1,093 yen (up 6.7%) and the yen depreciating to 105 against US dollar, after acknowledging the positive reaction to the result in the US market. Although there remains a great deal of uncertainty regarding Mr Trump’s policies on trade and defence, we can at least say that he will try to regain a strong America and seek higher growth by implementing tax cuts, infrastructure investment and deregulation. Notably stronger infrastructure investment, which is also targeted by G20 countries to escape from deflation and to regain strong growth, should have a significant impact on US economic growth and may cause a paradigm shift from deflation to inflation globally. Commodity prices such as oil and metals may inevitably increase with historical low levels of interest rates around the world coming to an end. This paradigm shift itself towards high growth and mild inflation should be a very positive factor for the Japanese economy and the market. Although we need to assess Trump’s policies on trade and defence carefully over the coming months, his victory speech on 9th November might have given some hope for an acceptable, more pragmatic and less fearful outcome in terms of anti-globalism.

The Fund is increasing its allocation to the machinery and IT service sectors with the conviction that capex will expand significantly as the labour shortage is getting serious and capacity constraints are emerging. A dramatic expansion of inbound tourists towards the 2020 Tokyo Olympics should contribute to the real estate and construction sectors. The Fund retains a 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 14/11/16 and are based on internal research and modelling.