US interest rate hikes have a long way to go

Market Development: In early February, the Japanese market gained on the back of solid Q3 results announcements, and from the strength in the US market. Reflecting the rise in long-term yields in the US and Japan, Japanese banks rallied.

Fund Commentary
17 Mar 2022

Market Development: In early February, the Japanese market gained on the back of solid Q3 results announcements, and from the strength in the US market. Reflecting the rise in long-term yields in the US and Japan, Japanese banks rallied.

In mid-February, Kishida announced an “easing of quarantine policy from March” after seeing a decline in new COVID cases, but concerns over geopolitical risks related to Ukraine, in addition to monetary tightening in the US, predominated the sentiment and the market pulled back.

In late February, the market continued to decline significantly when Russia attacked and invaded Ukraine on the 24th. At one point, the Nikkei 225 fell below 26,000 for the first time in 15 months. However, the US market rallied the next day and the Japanese market followed, ending with an uptick.

In February, the TOPIX closed the month at 1,886.9 (down 0.5% MoM) and the Nikkei 225 at 26,526.8 (down 1.8% MoM). 20 out of 33 sectors gained.

The top five performers were Marine Transportation, Steel, Air Transportation, Pharmaceuticals and Utilities. The bottom five performers were Rubber, Pulp & Paper, Textiles, Electricals and Insurance.

The 10-year JGB yield opened at 0.178 and at one point reached 0.23 (the first time in 6 years), following the announcement that US Consumer Price Index (CPI) inflation was +7.5% YoY in January, the highest level since 1982. After Russia invaded Ukraine, a wait-and-see attitude took over and the yield ended the month at 0.192.

The JPY against the USD began at 115.11 and appreciated to 114.16 the next day following the news that the January CPI in the eurozone had exceeded expectations, prompting Euro appreciation against the US Dollar. When the US CPI was also higher than market expectations, the US Dollar appreciated to 116.34. Following Russia’s invasion of Ukraine, risk-off Yen buying occurred and the rate ended the month at 115.00.

The crude oil price started at 88.15 and surged to 100.54 when Russia attacked Ukraine, the highest since 2014, before ending the month at 95.72.


Our hope that President Putin would not take military action against Ukraine was completely destroyed. It was reported that Russian troops attacked military facilities, nuclear sites and hospitals indiscriminately. Many Western companies decided to cease operations in Russia, such as production and sales activities. In turn, Mr Putin said that Russia would find “legal solutions” to seize Russian-based assets from international groups that have decided to close their operations in the country on the back of Moscow’s decision to invade Ukraine.

At this stage, it will not be easy to find a solution that will satisfy both parties. At some stage, China might adopt some kind of peacemaker role, but it may take a considerably long time for Russia to return as a member in international markets. In that sense, the price of oil, gas and other resources should remain high for a long time, and international trades will be restricted to some extent.

Germany has declared plans to significantly increase defence spending from 1.5% to 2.0% of GDP. They may also be tempted to increase nuclear power generation, reducing dependence on oil and gas. We believe green investments might be curbed for the short term internationally.

Meanwhile, the CPI in the US increased further by 7.9% YoY in February 2022, the highest YoY rise since January 1982. The core CPI (excluding foods and energy) accelerated its growth to 6.4% YoY in February from 5.9% YoY in January. It looks almost certain that the Fed will begin to increase the Fed Funds rate, regardless of developments in Ukraine.

In Japan, the Domestic Corporate Goods Price Index rose further in February to 9.3% YoY, from 8.9% YoY in January, marking the highest increase since December 1980 (+10.4%). The core CPI may rise over 1.5% YoY in the middle of 2022. The BoJ might be forced to change its monetary policy, given the weakness of the yen against the US Dollar, although they are now poised to maintain the current stance. That said, fiscal policies are reflationary around the world.

China may expand fiscal spending when the Olympic and Paralympic Games are over, with GDP growth targeted at 5.5% for 2022. India increased the budget for FY2022 by 13% YoY, out of which infrastructure spending, related to roads and railways, are set to increase by 51%.

Uncertainty and high volatility in the markets should continue for some time inevitably, but the global economy is looking resilient.

Portfolio Development

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese Yen basis as of 28th February 2022 went up 3.5% compared with that of 31st January, whilst the TOPIX TR Index declined 0.4% during the same period. The Fund did not add any new names to the portfolio and no stocks were sold out.

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 very cautious stance towards 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
+44 1481 742380


The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Fund as of 14/03/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.