BY YUTAKA UDA
In early August market sentiment in Japan was high, reflecting the 1Q company results which on average saw recurring profits up +30% YoY. On 10 August, the TOPIX reached a YTD record high, after the market rose for 9 consecutive days.
However, the following day the market fell back as the PBoC (People’s Bank of China) announced a mini-devaluation of the CNY against the dollar. As a result of the central bank cutting the yuan’s daily fixing rate for 3 days in a row, investors became anxious regarding the actual economy in China and world markets started to fall. When China’s August Caixin PMI, announced on 21st came out below consensus expectations and at the lowest level in six years and five months, world markets became increasingly risk-averse. This triggered the yen to strengthen and the Japanese market to decline sharply in line with other markets. On Monday 24th, the Shanghai composite index declined more than 8% and this led the Nikkei 225 to decline 4.6% and the TOPIX 5.9%, the biggest decline since May 2013. The market recovered on 26th after China announced monetary easing on the evening of 25th. The market was then supported by solid US economic indicators and depreciation of yen. The Nikkei 225 closed the month at 18,890.5 (down 8.2% MoM) and the TOPIX at 1,537.1 (down 7.4% MoM).
In terms of sector performance, of the 33 TSE sectors, 29 depreciated. The best five performers were miscellaneous manufacturing, textiles, pulp & paper, construction, and metal products. The worst five performers were steel, warehousing, securities, miscellaneous finance, and transportation equipment.
The JPY started the month at 123.89 against the dollar and appreciated sharply on 24th to 118.41 when world markets declined and money flew into the JPY as a safe haven asset. When markets stabilised, the JPY depreciated and settled at 121.23 at month end.
The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 28 August 2015 declined 6.1% compared with that of 31 July, while the TOPIX went down 6.6% during the same period. The Fund put no new names into the portfolio with no stocks sold out.
Investors around the world are quite anxious regarding how serious China’s actual economic situation is, but the Investment Adviser believes that China has many options at their disposal which could stimulate the real economy and the market. After the Chinese government announced further monetary easing on 25 August, the world stock markets have stabilised somewhat. More encouragingly commodity prices, which the market has read as an indicator of China’s economic conditions, have rebounded as the CRB index hit the bottom at 185.3 on 26 August and stood at 196.7 on 4 September. The Investment Adviser thinks that China will announce fiscal spending in the short term, which can stimulate actual economic activities, and of course, China has more room to cut interest rates.
In the meantime, we are currently witnessing a steady economic recovery in Japan. Industrial production in July declined 0.6% MoM with inventory down 0.8% MoM, and the government forecasts that industrial production in August would increase 2.8% MoM and decline 1.7% MoM in September. Thus it would recover 0.7% QoQ in July-September. Retail sales in July rose 1.2% MoM, higher than market consensus of up 0.6% MoM. The labour market is continuing to improve with the jobless ratio coming down to 3.3% in July vs 3.4% in June and the job offers to applicants ratio rising to 1.21 in July from 1.19 in June. Prime Minister Abe is expected to refocus on the economy once security related bills pass the Diet in mid-September, and the Japanese market will regain confidence with economic sensitive domestic sectors such as banks and real estate leading the rally. The Investment Adviser believes that the Japanese yen against US dollar will rise steadily towards 115 within six months, a level which is competitive enough for Japanese manufacturing and also helpful for importers.
Construction and real estate sectors should have more upside potential with replacement demands expanding sharply and 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 also maintain high weightings in the 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 10/09/15 and are based on internal research