There is some sign that the Japanese economy may come back to a healthy trend of growth

By Yutaka Uda

Fund Commentary
20 Nov 2014

By Yutaka Uda

In October, the Nikkei 225 Index recorded new year-to-date highs on the last day of the month. Average daily trading value on the first section of the Tokyo Stock Exchange (TSE-1) was above JPY 2 trillion once again similar to the previous month.

The Nikkei 225 Index closed the month at 16,413.8 (up 1.5% MoM) and the TOPIX at 1,333.6 (up 0.6% MoM). The JASDAQ Index fell 4.4% and TSE Mothers Index fell 5.1% over the month as the rally in Japanese equities towards the end of month was driven by large caps.

In terms of sector performance, of the 33 TSE sectors, 21 appreciated. The best five performers were fishery, real estate, land transportation, foods and utilities. The worst five performers were mining, glass & ceramics, nonferrous metals, oil and commerce.

At the beginning of October Japanese markets declined sharply as with other major markets as a result of the uncertainty in the economic outlook arising from concerning data coming from Germany, China, the US and Japan. The yen appreciated from the risk-off market and this further caused selling of Japanese equities. However, the market turned around from the latter half of October as the concerns for the US economy eased and as Yen depreciation occurred from increased dollar buying. Towards the very end of the month, the Fed decided to end the QE3 and the BOJ announced further monetary easing which accelerated the yen’s weakness and the rebound in the Japanese market. News on the GPIF’s increase in weights for Japanese equities also strongly impacted the appreciation in market performance. The yen started the month at JPY / USD 109.65 and appreciated towards JPY/USD 105.9 at one stage but depreciated again towards JPY/USD 112.3 by the end of the month.

…2H of FY2014 should record remarkable profits judging from an expected recovery of economic growth and recent yen weakness against major currencies.

The net asset value per share for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 31 October 2014 declined 0.2% compared with that of 30 September, while the TOPIX Index increased 0.6% during the same period. The Fund put no new names into the portfolio with no stocks sold out.

There is some sign that the Japanese economy may come back to a healthy trend of growth after negative reactions from consumption tax hike in April prevailed rather severely for a few months and bad weather conditions also badly affected consumer spending and industrial activities. Industrial production in September rose 2.7% MoM with shipments up 4.3% MoM and inventory down 0.8% MoM. The government survey suggests that industrial production in October might decline 0.1% MoM and increase 1.0% MoM in November. Some economists suggested that the negative impact on the GDP consumption as a result of the bad weather between June and August might have been 0.2-1.1% as a result of their analysis, but actually the savings ratio increased by almost 3 points from January to August, partly because public sentiment for shopping was damaged.

During the opening session on 31 October the Bank of Japan announced further monetary easing and that it would increase the JGB purchase to 80 trillion yen in 2015 from 50 trillion yen in 2014, together with an increase in the purchase of equity ETFs from 1 trillion to 3 trillion yen and J-REITs from 30 billion to 90 billion yen. This announcement came as a significant shock to the markets. On the same day after the market close the GPIF, which holds USD 1.2 trillion of assets, announced a massive change in its asset allocation that would see the weight of domestic equities increased to 25% from the previous basic weighting of 12% and foreign equities increased to 25% from 12% while holdings in domestic bonds will be cut substantially to 35% from 60%. The stock market was very strongly boosted with the Nikkei 225 Index up 755 points on 31 October and up 448 points on the following day. Currency markets also moved remarkably with JPY/USD down from 109 to 115 in a week. According to Nomura, as of 7 November, recurring profits (excluding financials) for 2Q FY2014 (July-September) increased 18% YoY, 9 points better than previous estimates. It implies the 2H of FY2014 should record remarkable profits judging from an expected recovery of economic growth and recent yen weakness against major currencies.

On the political front, international tensions look to have started easing off as Prime Minister Abe had a meeting with Chinese President Xi Jinping on 10 November for the first time after he took the position in December 2012. A fiscal stimulus package may follow in December together with the decision of another consumption tax hike. This news should provide a very positive impact to the stock market.

The Fund will continue to have a large exposure to the commerce (trading companies), construction and the real estate sector, while defensive sectors will remain very negative. The Fund will keep a high weighting in the banking sector.

Commentary provided by Evarich Asset Management in their Capacity as Investment Advisers to the Fund as of 11 November 2014