The Yen to stabilise in the short term


Fund Commentary
15 Apr 2016


In March, the Japanese market rebounded for the first time in 4 months. The implication by the FOMC of a moderate rise in US interest rates and solid US economic data brought reassurance and triggered a rise in risk appetite around the world. The package of easing measures announced by the ECB was also viewed favourably and global markets rose. However, the BoJ decided to maintain its monetary policy and as a consequence, the Yen strengthened against US dollar which limited the rebound for Japanese equities.

At the start of the month, the market bounced back as China announced monetary easing at the end of the February and as optimism emerged over the US economy and commodity prices. However, Japanese equities were easily swayed by the direction of Yen against the US dollar. Mid-month, the ECB announced additional monetary easing and the Japanese market reacted favourably, but subsequently declined when the Yen appreciated sharply when the BoJ made no changes to its policy. Furthermore, the FOMC indicated that they would maintain a moderate pace to rate hikes, which further strengthened the Yen. In late March, the market rallied to some extent as individual investors emerged prior to the record date for dividend payments at the end of March before declining immediately after. Also, it is suspected that additional selling pressure came from companies selling their mutual holdings of each others shares before the new FY commencing in April.

The market overall was return-reversal driven, previously top performing sectors became the worst performing sectors and vice-versa. The TOPIX closed the month at 1,347.2 (up 3.8% MoM) and the Nikkei 225 at 16,758.7 (up 4.6% MoM).

In terms of sector performance, 29 out of 33 sectors appreciated. The top five performers were retail, following strong earnings results, marine transportation, steel, glass & ceramics, and miscellaneous finance. The worst five performers were insurance, land transportation, non-ferrous metals, utilities and pharmaceuticals. The JPY started the month at 112.69 against the US dollar. At one point Yen appreciated close to 110 but reverted to 112.57 by month end.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 31 March 2016 increased 5.2% compared with that of 29 February 2016, while the TOPIX rose 3.8% during the same period. The Fund put no new names into the portfolio with no stocks sold out.

The Japanese economy is expected to recover sharply from 2Q 2016 after stagnant activity in the previous two quarters. Industrial production in February declined 6.2% MoM, partly due to the impact of production issues at a major automaker. However, the government estimated that industrial production in March would rise 3.9% MoM, and would continue to expand 5.3% MoM in April. Business sentiment remains weak at present. According to BoJ’s quarterly economic survey the “Tankan”, diffusion index (DI) for all large companies in March declined to 13 from 18 in December 2015, and the DI is expected to decline further to 11 in June. Against this background, the government is expected to take decisive action to stimulate domestic demand very shortly. Firstly, it is expected to announce in April spending 80% of the public works FY2016 budget within 1H of FY2016. Secondly, it is expected to announce a comprehensive economic stimulus package, including a JPY5-10 trillion supplementary budget, ahead of the G-7 Summit in late May. Additionally, the BoJ is likely to decide in favour of additional QQE at its next policy meeting on 27-28 April. Finally, another growth strategy will be announced in June ahead of the Upper House election in July.

The Chinese economy – one of the major contributors to the global market turbulence since the middle of 2015 – looks to be stabilising as a result of the Chinese government’s full commitment to utilise all policy tools to stimulate the economy. The Caixin Purchasing Managers’ Indices for both manufacturing and services rose sharply in March with the manufacturing PMI hitting 49.7, the highest in more than a year, and the services PMI rising to 52.2 from 51.2 in February. This has clearly contributed to the recovery of commodity prices.

The Investment Adviser believes the Japanese economy has a strong chance of entering a growth stage from Q2 for a prolonged period thanks to domestic economic stimulus policies and improving external factors. At present, the JPY/USD has temporarily moved to a level around 108, but when it comes back into a desirable range of 110-115, which the Investment Adviser believes it will shortly, the Japanese stock market should recover substantially to catch up with other markets. Economically sensitive domestic sectors and resource related stocks should lead the rally.

Construction and real estate sectors are expected to show another strong rally with replacement demands expanding sharply and the 2020 Tokyo Olympics related projects starting. The Fund is increasing its allocation to the machinery and IT service sectors with the conviction that capex will have to grow to seek higher productivity. The Fund will also maintain high weightings in banks and commerce (mainly trading companies) sectors. On the other hand, defensive and hardware 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 11/04/16 and are based on internal research and modelling.