Remarkable rally expected with accelerating economic recovery


Fund Commentary
16 Feb 2017


For the first time in 4 years, the Japanese market rose on the first day of the New Year; however, after that, the market gradually tailed off as the risks associated with Donald Trump’s protectionist regime caused concern.

As a consequence, the yen appreciated, which hurt the Japanese market. In the meantime, domestic numbers such as price indicators, employment data, industrial production, and inbound momentum were reasonably good. As a result, the Japanese market did not fall as much as the yen appreciated and remained highly priced when measured in US Dollars.

At the beginning of January, economic data from the US and China was brisk and the yen depreciated further. This drove the market with both the TOPIX and the Nikkei 225 advancing to higher levels than achieved in 2016; however, the yen started to appreciate as the rise in US rates paused. Weak oil prices also signalled a risk-averse market and Japanese equities started to decline. In addition, Trump’s comment regarding his concerns over the strong US dollar and ‘unfair’ trade in autos between Japan and the US caused the yen to strengthen further against the dollar which hurt the Japanese market. In late January, the Japanese market recovered after the Dow Jones closed above 20,000 for the first time in history, raising expectations for US economic expansion. However, the market declined again towards the end of month as a result of yen appreciation.

The TOPIX closed the month at 1,521.7 (up 0.2% MoM) and the Nikkei 225 at 19,041.3 (down 0.4% MoM). In terms of sector performance, 17 out of 33 sectors gained. The best five performers were marine transportation, oil, air transportation, steel and pulp & paper. The worst five performers were utility, mining, real estate, construction and transportation equipment.

The yen started the month at 116.96 against the US dollar and depreciated at one point close to 118 but appreciated sharply and ended the month at 112.80. At the same time, the yield on 10-year JGBs opened at 0.04% and ended at 0.085% as the BoJ was expected to decrease the volume of bond buying.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 31st January 2017 declined 0.1% compared with that of 30th December 2016, while the TOPIX went up 0.2% during the same period. The Fund put no new names into the portfolio with no stocks sold out.

There are plenty of signs that the Japanese economy is returning to strong growth. The job offers to applicants’ ratio in December 2016 increased to 1.43x, its highest level in the past 25 years. Industrial production in December rose 0.5% MoM, implying that industrial production in 4Q has accelerated to 2.0% QoQ after a steady recovery in the past few quarters (3Q +1.3% QoQ, 2Q +0.2% QoQ, 1Q -1.0% QoQ). The government estimates that industrial production in January 2017 will rise 3.0% MoM, and further increase 0.8% MoM in February. If March’s level is the same as February’s, industrial production in 1Q 2017 would rise 4.2% QoQ, suggesting that the economy is gathering strong momentum. Announcements regarding corporate profits for 4Q began in late January. According to Goldman Sachs, as of 6th February, 63% of companies listed on TSE 1st Section had disclosed their results for 3Q FY2016 (October-December) with net profits increasing 25% YoY, much better than the consensus for a 9% rise YoY, thanks to economic expansion and a weaker yen.

There remains some uncertainty regarding President Trump’s policies on trade and defence, but the Investment Adviser believes that his policies are clearly targeted at substantially increasing US economic growth, which should lift world economic growth and help to reduce deflationary pressures globally. In that sense they are expected to be more pragmatic and less fearful.

Japan has been suffering from persistent deflation over the long term, but Prime Minister Abe’s decisive economic policy, coupled with Trump’s new policy should transform Japan’s economic landscape. The Japanese stock market, which was hurt the most by deflation among the major markets, should be one of the major beneficiaries of these policies. Valuations are very cheap with a PBR 1.3x and PER 15x. The BoJ’s determination to buy JPY 6 trillion p.a. of equity ETFs may lead investors to feel that downside risk is limited. Mr. Abe is expected to utilise fiscal policy more effectively and speed up structural reforms with the BoJ maintaining monetary easing until 2% CPI is foreseeable. The Investment Adviser thinks the Japanese stock market will rise significantly from current levels through to the end of 2018.

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. Cyclical sectors such as steel and nonferrous metals are also targeted for higher exposure. The Fund retains a very 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 10/02/17 and are based on internal research and modelling.