US dollar weakness triggers a commodities recovery


Fund Commentary
19 Oct 2015


In September, the Japanese market declined sharply once again, following August’s trend. At the beginning of the month, the yen strengthened as global markets declined due to ongoing worries over the Chinese economy. The Chinese manufacturing PMI was weaker than consensus and prompted the Shanghai composite index to decline which led other markets down.

On 9 September, the Japanese market rebounded significantly, as the US, Europe and Shanghai index regained lost ground. The TOPIX gained 6.4% and Nikkei 225 7.7%. The 7.7% gain in Nikkei represented 1,343.43 yen and is the largest increase in the past 21 years, marking it the 6th largest gain in the index’s history. In mid-September, Chinese fixed-asset investments offered their lowest rise in the past 15 years. Markets continued to be volatile as sentiment moved between optimism and pessimism over Chinese and other Asian economies, as well as speculations regarding further monetary easing by the BoJ’s and the prospect of the Fed’s US rate hike. On 29 September, the TOPIX and Nikkei declined by 4.4% and 4.1% respectively, almost reaching 2015’s lowest prices. The TOPIX closed the month at 1,411.2 (down 8.2% MoM) and Nikkei at 17,388.2 (down 8.0% MoM).

In terms of sector performance, of the 33 TSE sectors, all sectors depreciated. The best five performers were rubber, retail, fishery & agriculture, metal products, and air transportation. The worst five performers were steel, insurance, mining, communication, and marine transportation.

The JPY started the month from 121.23 against the dollar and appreciated towards 118.99 during the beginning of the month. The appreciation in the JPY occurred due to risk aversion as a result of the slow-down in the Chinese economy and decline in crude oil price, which in turn led expectations for a US interest rate hike to lower. This month, the JPY was affected by expectations of changes for the US interest rate hike and the outlook for the Chinese economy. As a result the JPY ended the month at 119.88.

The net asset value per unit for the Nippon Growth (UCITS) Fund on Japanese yen basis as of 30 September 2015 went down 9.7% compared with that of 28 August, while the TOPIX declined 9.0% during the same period. The Fund put no new names into the portfolio with no stocks sold out.

The Japanese economy in 3Q 2015 is showing a somewhat patchy trend. Real household consumption in August increased 2.5% MoM after seasonal adjustment following a 0.6% rise MoM in July. The labour market is tightening further as job offers to applicants ratio in August increased to 1.23X, the highest in the past 23 years. The BoJ’s quarterly economic survey “Tankan” in September showed that large manufacturers DI fell to +12 from +15 in June, but large non-manufacturers DI increased to +25 from +23. The capital spending plans for all large companies for FY2015 increased to +10.9% YoY from +9.3% YoY in June. Industrial production in August declined 0.5% MoM, lower than market consensus of +1.0% MoM, and the government estimates that industrial production in September would rise 0.1% MoM and increase 4.4% MoM in October. Reflecting market turmoil triggered by the devaluation of the Chinese currency, business sentiments in 3Q deteriorated with exports shrinking. It was anticipated that the car industry would complete inventory adjustments by September in order to prepare for the launch of new models in 4Q. In that regard industrial production should expand sharply from 4Q. The Investment Adviser thinks that China still has many options available to avoid panic conditions and to stimulate the economy bringing growth back to desirable levels of 6.5- 7.0%, although its economy is on a downward trend in terms of structural growth for the longer term. There is some sign of economic stabilisation in China, for example housing prices have started to recover as a result of continuous monetary easing and fiscal policy. The Fed’s decision not to raise interest rates and weak job data in the US should indicate that the US dollar may change direction against major currencies and commodity markets may enter a recovery phase. Prime Minister Abe is expected to refocus on the economy with potential stimuli such as a supplementary budget or corporate tax cuts to be announced during 4Q, as the government passed security related bills in the Diet in mid-September.

The Investment Adviser still believes that the Japanese market is on track to return spectacular performance towards the end of 2017. The recent correction of 19% exhibited between the 10 August and 29 September should provide investors with a great opportunity to re-enter the market or increase exposure to Japanese equities.

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 13/10/15 and are based on internal research and modelling.