Trade frictions to be overcome without serious damage for either country


25 Apr 2018


In March, the Japanese stock market continued to be subject to sharp movements, influenced by the protectionist stance taken by US President Donald Trump and related media reports. Further, setbacks for US technology stocks also had a negative impact. The TOPIX closed the month at 1,716.3 (down 2.9% MoM), while the Nikkei 225 finished the month at 21,454.3 (down 2.8% MoM).

At the beginning of March, Japanese stocks fell sharply, as concerns mounted over a global economic slow down triggered by trade frictions, resulting from President Trump’s announcement to impose import restrictions on steel and aluminium. Later in the month, sentiment was slightly brightened by US jobs data, showing modest wage growth and meaningful additions to non-farm payrolls. The yen appreciated to a 105-106 level against the US dollar.

The Nikkei 225 was moving in a 21,000-22,000 range up to 22 March, when President Trump signed an executive order imposing tariffs on at least USD 50 billion of imports from China, leading to growing concerns about a trade war between the countries. The following day, the Nikkei 225 declined sharply by 974 points, down to 20,618, marking the first time the index traded below 21,000 since 12 October 2017. At the same time, the yen appreciated temporarily to 104 against the dollar. The stock market managed to regain some of its loss through to the end of the month as concerns over a trade war eased, following reports on “behind-the-scenes” talks between the US and China.

WTI crude oil rose from 61.6 $/bbl to 64.9 $/bbl during the month, while the US dollar started the month at 106.7, ending at 106.3 against the yen.

With regard to the TSE, foreign investors were net sellers for 11 straight weeks through to the third week of March, selling a total of JPY 8.5 trillion (cash and futures). In terms of sector performance, the five best performers were utilities, services, fishery & agriculture, retail and foods, while the worst five performers were steel, marine transportation, nonferrous metals, machinery and securities.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 29 March 2018 lost 4.6% compared with that of 28 February, while the TOPIX declined 3.6% during the same period. The Fund put no new name into the portfolio with no stocks sold out.

In March, China signalled its willingness to escalate the fight with Donald Trump over his plan for anti-China tariffs. China’s Vice Minister of Commerce was reported to say that “China does not want a trade war because no one will emerge as a winner in a trade war”, while Donald Trump’s new economic adviser indicated that “These are proposals. But the message is clear. China has got to stop unfair and illegal trading violations”. In fact, the US had a huge trade deficit of USD 375 billion with China in 2017, which the Investment Adviser hopes and believes will be resolved, aiming to meaningfully reduce the deficit.

The Japanese economy itself remains on track to make a sound recovery. According to the BoJ’s quarterly economic survey “Tankan” in March 2018, the diffusion index (DI) for large manufacturers declined by 2 points to 24, representing the first decline in 8 quarters. Overall, the DI for all companies across all industries however rose from 16 to 17, the highest level since September 1991. The survey further indicated that the production capacity index fell from -3 to -4, showing that more companies increasingly feel they have insufficient capacity to meet demand. Further, labour shortages have also continued to deepen, with the employment conditions index for all companies falling from -32 to -34. Industrial production rose 4.1% MoM in February, with the government forecasting that industrial production will rise 0.9% MoM in March, followed by a further increase of 5.2% MoM in April. Nationwide core CPI (excl. fresh food) rose 1.0% YoY in February, finally reaching the psychologically important level of 1.0%.

On the corporate profits front, Goldman Sachs estimates that the net profit for all companies on TSE1 would have increased by 21.4% YoY for FY2017, and would rise 3.5% for FY2018, followed by a further increase of 8.8% YoY for FY2019 (forecast figures based on an exchange rate of JPY/USD 110 for 2017 and JPY/USD 105 for FY2018 and 2019). It appears that Japanese companies are becoming resilient to the yen appreciation.

The Investment Adviser takes the view that the yen will, in the future, trade in the range of 105-115 against the US dollar. When uncertainties surrounding trade frictions vanish and the yen stabilises, which the team think will be in the short term, the stock market should start a significant rally.

The Fund is increasing its allocation to energy-related sectors such as oil and trading companies together with cyclical sectors such as steel, non-ferrous metals and chemicals since infrastructure demands should support or lift global economic growth. The Fund retains a positive stance towards banks and machinery stocks, while defensive sectors such as foods, pharmaceuticals and utilities continue to be avoided.

The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Funds as of 10/04/18 and are based on internal research and modelling.