Concrete measures on fiscal stimulus lay ahead after large market events

BY YUTAKA UDA

Monthly Fund Commentary
17 Jun 2016

BY YUTAKA UDA

In May, optimism increased in the Japanese market as 1) The Yen depreciated against the US dollar, 2) Corporate earnings forecasts showed marginal increases in earnings on average and 3) Prime Minister Abe decided to delay the sales tax hike.

It was the Golden Week holiday in Japan at the beginning of the month and the market was only open on the 2nd and 6th during the first week. On 2nd May, the Yen appreciated further and the stock market continued to decline after the BoJ decided against additional monetary easing at the end of April. On the 6th, the market declined further as concerns for announcements on negative earnings forecasts prevailed. From mid- May, the market regained risk appetite as crude oil recovered and US equities advanced, causing the Japanese market to rise. On the 18th April, FOMC minutes were released which indicated to the market that if the US saw further positive economic indicators, there was a possibility of a rate hike in June. With this, the Yen weakened against the US dollar, which supported the Japanese market, especially foreign demand related stocks. At the end of May, the market lost momentum as the Ise-Shima G7 summit approached. At one point the market was disappointed by the fact that the G7 finance ministers failed to agree on meaningful fiscal measures. However, on 27th May, the G7 Ise-Shima leaders’ declaration was adopted and expectations were raised for global government measures going forward. On 30th May, Prime Minister Abe’s decision to delay Japan’s sales tax hike was reported and this was also interpreted positively by the market. The Nikkei average recovered to the 17,000 level by the end of May.

The TOPIX closed the month at 1,379.8 (up 2.9% MoM) and the Nikkei 225 at 17,235 (up 3.4% MoM).

In terms of sector performance, 27 out of 33 sectors appreciated. The best five performers were miscellaneous manufacturing, construction, foods, transportation equipment and banking. The worst five performers were rubber, oil, miscellaneous financing, steel, and utilities.

The Yen began the month at 106.5 against the US dollar and depreciated gradually as the market regained confidence and favoured risk. When expectations arose for a US rate hike in June, the Yen further declined against the US dollar and ended the month at 110.7.

The net asset value per unit for the Fund on a Japanese yen basis as of 31 May 2016 went up 3.4% compared with that of 28 April 2016, while the TOPIX rose 2.9% during the same period. The Fund put no new names into the portfolio with one stock (Lixil Group) sold out.

The Japanese economy looks to be on track for a sound recovery. Industrial production in April increased 0.3% MoM, lower than the previous estimate of up 2.6% MoM, but better than the market consensus of -1.5% MoM. Shipments in April increased 1.5% MoM with inventory down 1.7% MoM. The government estimates that industrial production in May will rise 2.2% MoM, and increase by a further 0.3% MoM in June. The labour market is tightening further with the job offers to applicant ratio in April rising to 1.34X, the highest since November 1991, but the headline consumer price index fell 0.3% YoY in April after a fall of 0.1% YoY in March, while core CPI (excluding energy and fresh food) in April rose 0.9% YoY.

At the G7 meeting at Ise-Shima in Japan on 26-27th May, Prime Minister Abe appealed to leaders that a global fiscal stimulus should be implemented to avoid significant risks to the global economic outlook which is as grim as it was after the Lehman Shock in 2008, but he failed to win support for stimulus from some European members. Although G7 leaders agreed that global growth is an urgent priority, each G7 country should tailor its economic policies to its own needs.

On 1st June, Mr. Abe officially announced a postponement of the consumption tax hike from April 2017 to October 2019 and set the election date in the Upper House to be held on 10th July. When he announced the Cabinet’s decision regarding another growth strategy on 2nd June, he hinted that a bold comprehensive economic stimulus package, including a FY2016 supplementary budget, would be decided upon in September. This was a little disappointing as investors’ expectations were that the stimulus package would be announced before the election. Recent improved economic data might have helped Mr. Abe relax the timing of the stimulus, but the Investment Adviser is quite certain that the government will take action to boost the economy within a few months. The Investment Adviser continues to believe that decisive fiscal stimulus followed by further quantitative easing should be a trigger for a market rally.

The Fund is increasing 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. A dramatic expansion of inbound tourists towards the 2020 Tokyo Olympics should contribute to real estate and construction sectors. The Fund retains high weightings in 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 14/06/16 and are based on internal research and modelling.