Property market to enjoy “longer strides”

At the beginning of October, the Japanese market gained on the back of a depreciating yen, with the Nikkei 225 index reaching 24,270, the highest level in almost 27 years since the Japanese bubble era.

Fund Commentary
20 Nov 2018

At the beginning of October, the Japanese market gained on the back of a depreciating yen, with the Nikkei 225 index reaching 24,270, the highest level in almost 27 years since the Japanese bubble era.

That said, the Japanese market detracted when the US market started to decrease from the 3rd October onwards, following a rise in the US long-term yield (to above 3.2%) and the risk associated with the fiscal situation in Italy.

In light of a high US long-term yield, the risk-off market prevailed in mid-October. On 11th October, the Japanese market declined substantially (constituting the 3rd largest decline this year), following an appreciation of the yen and a downward earnings revision of Yaskawa Electric which impacted the manufacturers’ stocks. On 15th October, Prime Minister Abe confirmed the consumption tax hike in October 2019, increasing concerns about Japan’s economic outlook. In late October, the decline of the Japanese market continued as the weakness of the US and Chinese market carried on.

During the month, banks and real estate stocks performed, while manufactures remained weak amid declining Chinese stocks. Japanese semiconductor and IT stocks were impacted by a decline in US tech stocks following disappointing news from companies such as Amazon. Defensive and domestic names fared comparatively better, whilst China-related and growth stocks were sold off. Towards the end of the month, the market recovered slightly from a depreciation in yen and a rebound in the US and Chinese market.

In October, domestic data releases were encouraging in terms of 1) capital expenditures, 2) labour statistics, and 3) CPI. Core machinery orders for the private sector increased +6.8% MoM in August, showing an improvement for 2 consecutive months.

September’s labour statistics indicated a further tightening of the labour market, with a (seasonally–adjusted) unemployment rate of 2.3% and a job offers-to-applicants ratio of 1.64x. September’s core CPI also improved relative to the previous month, rising 1% YoY (excl. fresh food). That said, production and inbound tourism were disappointing. September’s monthly industrial production detracted -1.1% MoM, while tourist arrivals declined by -5.3% YoY, the first negative growth since 2013.

The TOPIX closed the month at 1,646.1 (down -9.4% MoM), whilst the Nikkei 225 finished at 21,920.5 (down -9.1% MoM). In terms of sector performance, all 33 sectors declined, with the five worst performers being marine transportation, glass and ceramics, chemicals, steel, and miscellaneous manufacturing. At the same time, the five best performers were rubber, air transportation, utilities, miscellaneous finance and pulp & paper.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 31 October 2018 declined -8.3% compared with that of 28th September, while the TOPIX decreased -9.4% during the same period. The Fund put no new names into the portfolio, with no stocks sold out.

In October, Japanese economic data was volatile partly due to natural disasters. Industrial production declined by -1.1% MoM in September, with the temporary closure of airports and ports in Kansai and Hokkaido area, caused by typhoons and earthquakes, straining supply chains, distributions and inbound tourism.

Industrial production in 3Q (July-September) decreased by -1.6% QoQ. The government expects that industrial production will rise 6.0% MoM in October, followed by a 0.8% MoM decline in November.

Core machinery orders decreased sharply by -18.3% MoM in September. That said, machinery orders managed to maintain a positive quarterly up trend, with the 3Q orders having recorded the fifth consecutive QoQ rise (up 0.9%). The government expects core machinery orders in 4Q to continue to increase by 3.6% QoQ.

The property market in Tokyo is keeping its strong momentum. According to the company Miki Shoji, the vacancy rate of office buildings in the Tokyo 5 main wards dropped to 2.2% in October, the lowest since January 2001, when monthly data first became available. The average asking rent in October increased in an accelerating manner, rising 8.2% YoY to 20,597 yen/tsubo (3.3 m2), up from a 7.6% YoY increase in September. The Investment Adviser recently re-examined the property market conditions, and concluded that the vacancy rate would remain below 3% until early 2020, which is regarded as quite tight. The team anticipate the average asking rent to reach 23,000 yen/tsubo in December 2020, which is higher than the peak of 22,901 yen in August 2008 during the previous property bubble period.

As the Investment Adviser pointed out in last month’s commentary, the “work-style reform-related bills” should create a positive impact on the economy, with the labour shortage, capex expansion and tight property market extending “in long strides”. On 7th November, the first supplementary budget for FY2018 passed in the Diet, with additional economic stimulus being discussed at the beginning of 2019 to make sure that the sound economic growth is maintained after the scheduled consumption tax hike from 8 to 10% in October 2019.

The outcome from the midterm election in the USA was almost in line with market expectations, unlikely to change the strong economic growth trend in the USA. The team think that the emphasis of economic policies might be shifted from tax cuts to infrastructure spending.

Against the backdrop of Japan’s vulnerability against natural disasters and sizable fiscal spending to be decided from November onwards, the Investment Adviser is in the process of adding one additional name in the construction sector to the Fund, increasing the weighting in the real estate sector. The team remain quite confident regarding the outlook of both, the Japanese and world economy, which is why the Fund is overweight with regards to economic sensitive sectors such as energy, banking and machinery. At the same time, defensive sectors such as foods, pharmaceuticals and utilities continue to be avoided.

The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Funds as of 09/11/18 and are based on internal research and modelling.