BY YUTAKA UDA
The Japanese market rose for the fifth consecutive month in May. The Market Cap of the Tokyo Stock Exchange’s first section exceeded over 600 trillion JPY for the first time in history.
There was a long weekend at the beginning of May in Japan, and the market was affected by weak stock markets abroad. However, from mid-May, the Yen started to weaken in anticipation of a US rate hike. In addition, Japanese economic figures such as the preliminary estimate of GDP growth for Jan-Mar, and private sector demand in capex and consumption were above consensus. Exporters were bought as well as laggard domestic sectors such as banks and utilities. From 15th May to the last day of the month, Japanese stocks kept rising for 11 consecutive days for the first time in 27 years.
The Nikkei 225 closed the month at 20,563.2 (up 5.3% MoM) and the TOPIX at 1,673.7 (up 5.1% MoM).
In terms of sector performance, of the 33 TSE sectors, 31 appreciated. The best five performers were nonferrous metals, utilities, machinery, insurance and steel. The worst five performers were mining, pharmaceuticals, marine transportation, warehousing, and precision instruments.
The Yen started the month at 119.38 against the USD, and was stable in the beginning. From mid-month, expectations for a US rate hike, and concerns regarding Greece rose, as a result the Yen depreciated against the dollar, ending the month at 124.15.
The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 29 May 2015 went up 5.6% compared with that of 30 April, while the TOPIX rose 5.1% during the same period. The fund put no new name into the portfolio with no stock sold out.
It is becoming clear that capital expenditure (capex) will lead Japan’s economic recovery. According to the MoF’s corporate statistics for Q1 2015 revealed on 1st June, capex (excluding software) grew 5.8% QoQ on a seasonally adjusted basis, marking the third consecutive QoQ expansion.
Capex by manufacturers rose 2.3% QoQ, while non-manufacturers (excluding financials and insurance) recorded strong growth of 7.6%. This number greatly exceeded the estimate in the first preliminary GDP reading of 0.5% QoQ rise. Separately the Nikkei Shinbun reported that based on 1219 companies’ plans, capex in FY2015 would increase 10.5% YoY, the highest in 3 years. Manufacturing industries would increase 17.3% YoY, much higher than FY2014 increase of 2.6% YoY. Non-manufacturing industries would increase 2.0% YoY, lower than 5.8% YoY rise in FY2014. This lower increase in FY2015 is mainly because of a sharp decline of -10.3% YoY in the telecommunication industry.
Other non-manufacturing industries such as railroad (up 15.4% YoY), real estate (up 13.1%), service (up 11.5%) and land transportation (up 26.2%) are accelerating their capex growth. We want to reiterate strongly that capex will expand dramatically across the industries to seek higher productivity for the coming four years and will act as a driving force for strong growth in Japan of 2.0-2.5% in real terms and 3.5-4.0% in nominal terms. Spring wage hike negotiations in April were settled with salary increase of 2.5% YoY, the highest growth since 1998, which is expected to feed through from June and would contribute to higher consumption and housing investment.
The Japanese yen against the US dollar reached the 125 level in early June, but it looks like the Yen weakness has gone too far given the trade balance and interest rate differential. The current weakness of the Yen should stimulate or encourage inbound visitors, inward investment by foreigners and re-shoring of Japanese manufacturers further. The Corporate Governance Code by the Tokyo Stock Exchange has come into force on 1 June, which should push Japanese corporations to release mutual holdings and to pursue higher ROE and increase shareholders’ return.
Construction and real estate sectors should have more upside potential with replacement demands expanding sharply and the 2020 Tokyo Olympics related projects starting. The fund is increasing allocation to the machinery sector with the conviction that capex will have to grow to seek higher productivity. The fund will keep a high weighting in banks and commerce (mainly trading companies) sectors. On the other hand, defensive and technology sectors should be avoided as these have high valuations and lower growth potential.
The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Fund as of 12/06/15 and are based on internal research and modelling.