Sizeable economic stimulus package to be a trigger for sharp rally


Fund Commentary
18 May 2016


In April, Japanese equities continued to be volatile and were affected by 1) movements in the currency market as well as world stock markets, 2) crude oil prices, 3) the earthquake in the Kumamoto prefecture and 4) the BoJ’s monetary policy.

On 1st April, the BoJ Tankan survey was released which indicated a significant deterioration in business confidence by corporates. In addition, low crude oil prices and the appreciation of the Yen brought negative sentiment to the market. Japanese stocks sold off until 6th April when the Yen appreciated to the high 107 range vs the US Dollar. The Japanese market rebounded after a senior Japanese government official made remarks on restraining the Yen’s rise. However, the market declined again when the Kumamoto prefecture was hit by a sequence of earthquakes from the 14th including a magnitude 7.0 quake on 16th April, which raised concerns about supply chains and corporate earnings. When crude oil prices started to rise again, world markets regained their risk-on mood, the Yen depreciated and the Japanese market recovered. On the last day of April however, the Japanese market declined sharply when the BoJ’s Monetary Policy Meeting decided against additional monetary easing, which fell short of expectations.

The TOPIX closed the month at 1,340.6 (down 0.5% MoM) and the Nikkei 225 at 16,666.1 (down 0.6% MoM). In terms of sector performance, 18 out of 33 sectors declined. The best five performers were oil, glass and ceramics, fishery & agriculture, steel and non-ferrous metal. The worst five performers were utilities, securities, transportation equipment, retail and air transportation.

The Yen started the month at 112.57 against the US Dollar but appreciated towards a high of 107 as expectations arose for slower interest rate hikes from the Fed. However, when the US market rallied in late April, this expectation faded and the Yen reverted to 111.5. Finally, the Yen appreciated sharply on the last day when the BoJ decided to maintain the current monetary policy. As a result, Yen ended the month at 106.5.

The yield on 10-year JGBs opened at -0.05% and closed at -0.085%. At one point, the yield fell to -0.135%, matching 18th March when the yield closed at the historical low.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 28 April 2016 declined 1.5% compared with that of 31 March 2016, while the TOPIX declined 0.5% during the same period. The Fund put no new names into the portfolio with no stocks sold out.

The Investment Adviser continues to believe that the Japanese economy will recover soundly from 2Q 2016 although the Kumamoto earthquake in April may cause some short-term production issues in the auto industry. Industrial production in March increased 3.6% MoM, and the government estimates that industrial production in April will rise 2.6% MoM and decline 2.3% MoM in May. The estimated numbers mentioned above are likely to be revised down as they do not appear to reflect any negative impact from the earthquake. Housing starts in March rose 8.4% YoY, and the labour market is tightening further with the jobless ratio in March declining to 3.2% from 3.3% in February and the job offers to applicant ratio rose to 1.30x from 1.28x in February. New car sales in April on a seasonally adjusted basis increased 9.4% MoM, 1.6% YoY. But the recent strength of the Yen has cast a shadow over business sentiment.

It is now the reporting season for financial results of FY2015. According to Mitsubishi UFJ Morgan Stanley Securities, as of 10th May, more than 35% of TSE first section companies have announced their results with recurring profits rising 8.9% YoY. But their estimates for FY2016 are pretty cautious with recurring profits declining 4.7% YoY due mainly to the strength of the Yen.

Since the consumption tax hike on 1st April 2014, the Japanese economy has been stagnant. There are two reasons for that, one is that fiscal policy (the second arrow of Abenomics) was actually contradictory as public works spending declined in both FY2014 and FY2015. The other reason is that private consumption was very weak. During the period, the saving ratio has risen from 1-2% to 7-8%, reflecting gloomy consumer sentiment despite personal income rising steadily. It is clear what the government should do now. Following the declaration at the G20 meeting in Shanghai on 27th February, Prime Minister Abe is looking to announce coordinated action on fiscal stimulus policy at the G7 meeting at Ise-Shima in Japan on 26th and 27th May. It is very likely that Japan will lead the discussion on fiscal policy to lift world economic growth, and will announce a comprehensive economic stimulus package including a JPY5-10 trillion supplementary budget of its own. The announcement should be the trigger for capex and consumption to expand and should contribute to currency stability. The Japanese stock market should show a remarkable recovery with economic sensitive stocks leading the rally.

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 real estate and construction sectors. The Fund retains high weightings in 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 13/05/16 and are based on internal research and modelling.