BY YUTAKA UDA
On 4th January 2018, the Japanese stock market opened the first trading session of the year strongly, with the Nikkei 225 up 741 yen on the back of bullish market trends overseas, reaching 24,000 for the first time in 26 years on 23rd January, followed by a decline in the market on the back of the yen strengthening against the US dollar. Overall, the Nikkei 225 closed the month at 23,098.3 (up 1.5% MoM), while the TOPIX ended the month at 1,836.7 (up 1.1% MoM).
The Japanese market got off to a promising start in January, propelled by expectations regarding global economic growth, which is likely to fuel a further expansion in corporate profits. The market continued to rally until 23rd January, despite the yen appreciating against the US dollar from 113 to 110, following news that the Bank of Japan decreased its long-dated bond purchases on 10th January.
On 22nd January, the IMF raised its worldwide economic growth forecast for 2018 from 3.7% to 3.9% and at the same time revised its growth forecast for Japan up from 0.7% to 1.2%. The same day an ordinary Diet session commenced in Japan, with both events likely to have contributed to the Nikkei’s strong rally to 24,000 on 23rd.
Later in the month, the yen appreciated further (reaching 108 against the US dollar), impacted by a comment by the US Treasury Secretary Mnuchin, stating he was tolerating the dollar depreciation. Investors were tempted to take profits in the wake of a sharp rally during previous weeks. At the end of the month, the Nikkei 225 fell for six consecutive days through to 31st January.
Generally, small stocks outperformed large stocks throughout the month. The second section of the TSE rose 4.0% MoM, with the JASDAQ index gaining 7.2% MoM and the TSE Mothers index increasing 6.6% MoM. In terms of sector performance, 19 out of the 33 TSE sectors gained. The five best performers were real estate, securities, miscellaneous manufacturing, machinery and miscellaneous finance, while the five worst performers were air transportation, construction, fishery & agriculture, steel and warehousing & harbour transportation.
WTI crude oil rose from 60.4 $/bbl to 64.7 $/bbl during the month, while the US dollar initially started the month at 112.7, finishing at 109.2 against the yen.
The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 31 January 2018 increased 1.8% compared with that of 29 December 2017, while the TOPIX rose 1.1% during the same period. The Fund put no new names into the portfolio with no stocks sold out.
At present, the Japanese economy is maintaining a strong growth trajectory. Industrial production rose 2.7% MoM in December 2017, resulting in a 1.8% QoQ increase in Q4 2017, marking 7 consecutive QoQ increases. The government estimates that industrial production will decline 4.3% MoM in January 2018, followed by a rise of 5.7% MoM in February. The reporting season for corporate profits for Q3 FY2017 is currently in progress.
According to the Nikkei Newspaper (as of 8 February 2018), 70.4% of all listed companies (excluding financials and new markets) announced that recurring profits for the months Apr-Dec FY2017 increased 20.3% YoY, with net profits up 34.0% YoY. According to companies’ estimates recurring profits for the entire FY2017 will rise 14.7% YoY, with these estimates however being quite conservative and leaving room for an upward revision.
Against this backdrop, the Japanese stock market experienced a severe correction in early February. The TOPIX declined 4.4% on 6th February after having previously decreased by 2.2% on 5th February. Selling pressures mounted again shortly after, with the TOPIX declining 1.9% on 9th February.
The heavy loss in the New York market (triggered by an increase in long-term interest rates) caused uncertainty and volatility in global markets. We would however like to stress that the US 10 year Treasury yield is currently still below 3%, whereas it was 8-9% in 1987 (Black Monday), and 4-5% in 2007 (Subprime-Lehman shock). The US economy is expected to grow strongly, supported by tax reforms and infrastructure projects. We regard the market corrections as a healthy and speedy adjustment, rather than a move towards a bear market (indicated by a more than 20% decline). President Trump’s speech in his first official State of the Union address, in which he indicated a USD 1.5 trillion infrastructure spending plan, should determine the direction for the global economy.
In Japan, most cases of bear markets coincide with economic deteriorations or extreme overvaluations. Volatility may persist for some time but when the US budget for FY2018 is passed by the Congress, which we hope to happen in the next few weeks, the market should start to regain strong momentum. The Fund is increasing its allocation to cyclical sectors such as steel, non-ferrous metals, and chemicals together with energy, since infrastructure demands should support or lift global economic growth.
The Fund retains a positive stance towards banks, trading companies and machinery, while defensive sectors such as foods, pharmaceuticals and utilities are continued to be avoided.
The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Fund as of 09/02/18 and are based on internal research and modelling