World economic growth to be lifted by new policies from Mr. Trump


Fund Commentary
19 Jan 2017


In December, the market continued to advance supported by 1) The continuous rise in crude oil prices after OPEC’s decision to cut production for the first time in 8 years, and 2) The ECB’s decision to extend its asset purchasing program.

In addition, the trend of the weakening yen against the US dollar from rises in the US long term yield continued after the US presidential election, further supporting the Japanese market.

At the beginning of the month, the Japanese market rallied as crude oil prices continued to advance and as the yen remained weak due to rising US long term yields. On 8th December, the ECB decided to extend its asset purchasing program and the market advanced further. When the Fed agreed a rate hike at the FOMC meeting on 14th December, the yen weakened further against the US dollar on expectations of more rapid US rate hikes going forward. These market developments in the first half of the month resulted in the Japanese market rallying for 9 consecutive days until 16th December. On 19th December, Japanese November trading figures were released and showed a substantial improvement on export volumes. When the BoJ revised up its economic outlook, centred on exports and production, and maintained its monetary policy at the policy meeting on 20th December, the TOPIX closed at 1560, its highest level in 2016. Subsequently, trading reduced and profit taking took place.

The TOPIX closed the month at 1,518.6 (up 3.4% MoM) and the Nikkei 225 at 19,114.4 (up 4.4% MoM). In terms of sector performance, 30 out of 33 sectors gained. The best five performers were oil, securities, fishery, mining and utilities. The worst five performers were miscellaneous manufacturing, rubber, pulp & paper, air transportation and real estate.

The yen started the month at 114.46 against the US dollar and at one point had depreciated as far as 118 as the rate gap between US and Japan was suspected to become larger when the Fed hinted at faster rate hikes, while the BoJ kept the status quo. However, the currency lost momentum as the holiday season approached and the yen settled at 116.96 by the end of the month.

The yield on 10-year JGBs opened at 0.02% and rose with US treasuries, at one point hitting 0.1%. However, the BoJ maintained its stance that it would cap interest rates and the JGB yield declined, ending the month at 0.04%.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 30 December 2016 rose 3.1% compared with that of 30 November, while the TOPIX went up 3.4% during the same period. The Fund put one new name (Mitsubishi Motors) into the portfolio with one stock (Sumitomo Forestry) sold out.

The Basel Committee on Banking Supervision announced on 3rd January 2017 that a meeting of the world’s top bank supervisors and central bankers scheduled for 7-8th January to consider a contentious reform package had been postponed until at least the next meeting scheduled in March. The result is, key parts of the reform are still not agreed between the US and the European supervisors. The US supervisors are said to be requesting stricter rules on the so-called output floor that limits banks’ lending. European banks have welcomed this postponement as it means the committee will be dealing with this matter with a new US administration. Mr Donald Trump has said he wants to relax financial regulation so this postponement looks to be good news for global economic growth and the banking sector on a long term view. But for the short term, uncertainty over the banking system may continue for a few months, meaning investors may be discouraged from investing in banking stocks. We hope this matter will be resolved at the next meeting. For Japanese banks, the level of the output floor does not matter, as they have built strong balance sheets to prepare for it. What matters is how quickly the uncertainty on the rules is removed.

Macro-wise, the Japanese economy is gathering strong momentum. Industrial production in November 2016 rose 1.5% MoM with inventory declining 1.5% MoM. The government estimates that production will rise 2.0% MoM in December and further increase 2.2% MoM in January 2017. If the estimate is right, industrial production in 4Q (Oct-Dec) would increase 2.6% QoQ following the recent steady recovery (3Q: 1.4% QoQ, 2Q: 0.2% QoQ, 1Q: -1.0% QoQ). Corporate profits for 4Q will start to be reported from late January with sharp upward revisions expected, judging from the level of the economic activity and currency movements.

For the time being, market attention should be focused on Mr Trump’s policies which should be clearer in February. There are plenty of comments and criticism coming in from various fields on his policies and his cabinet members, but we believe that his top priority should be how to strengthen the US economy, which in turn would be very positive for global economic growth. The Japanese stock market should be one of the major beneficiaries of these policies.

The Fund is increasing its allocation to the machinery and IT service sectors with the conviction that capex will expand significantly as the labour shortage is getting serious and capacity constraints are emerging. Cyclical sectors such as steel and nonferrous metals are also targeted for higher exposure. The Fund retains a very positive stance towards banks and trading companies, while defensive sectors such as foods, pharmaceuticals and utilities are avoided.

The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Fund as of 13/01/17 and are based on internal research and modelling.