BY YUTAKA UDA
In April, the Japanese market gained more than the US against a backdrop of rising US long-term yields, which resulted in a depreciation of the JPY and an increase in the yield on 10-year JGBs. Rising WTI oil price futures also supported the market.
In early April, the market moved within a range, similar to the US market as concerns remained regarding US-China trade frictions and geopolitical risks such as Syria. Domestic sectors were sought as the March BoJ Tankan survey results (announced on the 2nd April) showed the continuing strength of the business conditions DI and strong capex plan for FY18 of 2.3% YoY growth for large companies across all industries. In mid-April, WTI oil price futures surged, and economic sensitive sectors, as well as foreign-oriented names became popular.
Later in the month, FY earnings results started to be announced and the market swayed accordingly, which favoured electrical machinery stocks, but led to caution with regards to other exporters given weaker than expected forecasts from Caterpillar and Fanuc. Financials and economic sensitive names, however, reacted positively as US long-term yields surged, resulting in a depreciation of the Yen. The BoJ maintained its monetary policy at its monetary policy meeting which took place on the 27th April.
The TOPIX closed the month at 1,777.2 (up 3.6% MoM) and the Nikkei 225 at 22,467.9 (up 4.7% MoM). In terms of sector performance, 31 sectors among the 33 sectors gained. The best five performers were utilities, insurance, oil, real estate, and land transportation, whilst the worst five performers were services, pharmaceuticals, rubber, electrical equipment, and other products.
The Yen started the month at 106.28 against the US dollar and fluctuated in the range from highs of 105 and lows of 107 in the earlier part of the period. The Yen, however, depreciated as the US long rate rose from late April, and ended the month at 109.34. The yield on 10-year JGBs opened at 0.049% but declined to 0.03% when the 10-year JGB auction saw high appetite on the 3rd April. The US 10-year treasury yield rising towards 3% in late April, led the 10-year JGBs to start to rise again and ended the month at 0.055.
The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 27 April 2018 went up 4.9% compared with that of 29 March 2018, while the TOPIX rose 4.3% during the same period. The Fund put one new name (INPEX) into the portfolio with no stock sold out.
On 8th May, President Trump announced that the US would withdraw from the landmark 2015 nuclear deal with Iran and re-impose sanctions on the country. Oil prices rose the following day in response as Iran may find it difficult to export crude oil.
The Investment Adviser argues that aside from this event, oil prices should rise further as world oil demand is expected to increase more than 1.5% p.a. for the coming few years, driven by expanding infrastructure investment in Asia and possibly the US. On the supply side, OPEC countries are united with the aim of keeping production under control in co-operation with Russia. The EIA (Energy Information Administration) estimates that shale oil production in the US may start to slow down from 2019. The Investment Adviser would not be surprised to see the WTI crude oil price rise towards 100 USD/bbl in 2020, the approximate level achieved between 2011-2014 when shale oil production in the US had not yet impacted the oil markets.
An anticipated sharp increase of infrastructure investments should support world economic growth with demand and prices within the materials sector lifting accordingly. In particular, the steel industry should be a beneficiary, being a key material for use in infrastructure projects such as railways, roads, ports and so on. The supply and demand situation within the global steel industry is improving, as China is continuing to cut its over capacity, while the demand for steel in Asia, notably India and Indonesia is increasing sharply, supported by the governments’ aggressive stance with regards to infrastructure projects. Higher oil prices are not a negative factor for the Japanese economy as it should have a positive impact on capex, with mild and favourable inflation coming back.
The Japanese economy itself remains intact at present. Industrial production in March rose 1.2% MoM, better than market consensus of 0.5% up MoM, and the government forecast that industrial production in April would rise 3.1% MoM, followed by 1.6% MoM decline in May. After the USD/JPY rate hit the recent bottom at 104 in March, the dollar is recovering. When geopolitical risk and trade disputes become less serious and clarity is obtained in this regard, the USD/JPY should move to a level between 110-115, which interest differentials between the US and Japan suggest to be fair. The Investment Adviser thinks that the Japanese stock market will rise substantially from now on towards mid 2019 with the TOPIX reaching 2,400, 35% higher than the current level.
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 11/05/18 and are based on internal research and modelling.