The market awaits implementation of Trump’s new policies

BY YUTAKA UDA

Monthly Fund Commentary
21 Apr 2017

BY YUTAKA UDA

In March, the Japanese stock market rallied based on the expectation there would be an early rate hike in the US, but subsequently fell after the Fed raised the key rate. This reflected a retreating view that the pace of hikes would accelerate, as well as uncertainties over US government policy manoeuvres.

In the first half of March, Japanese equity prices began by rising when the yen weakened against the US dollar after President Trump’s speech to Congress on 28 February. Trump’s speech was met with approval and expectations grew of an early hike in the US. The Fed went on to hike the key rate as expected on 15 March, however the view that it would accelerate the pace of hikes retreated, and the market started to decline as the rise in US long-term interest rates paused and the yen appreciated. Subsequently, Japanese equity prices fell back in the second half of March. Concerns also grew for the Abe government after allegations made by the director of a school in Osaka, at the centre of a cut-price land deal scandal, that the Prime Minister made a financial donation to the school. The scandal has turned overseas investors away from Japanese stocks. In the US, President Trump was forced to withdraw its repeal of the Affordable Care Act (Obamacare), and the administration’s centrepiece economic stimulus measures became bogged down in Congress. US stocks plunged amid a sense of uncertainty regarding policy implementation by the Trump administration. The yen appreciated and US interest rates fell, leading to a decline in the Japanese market.

On 31st March, the Nikkei 225 closed below 19,000 in response to substantial sales by Japanese institutional investors aimed at locking in profits ahead of the fiscal year end. The TOPIX closed the month at 1,512.6 (down 1.5% MoM) and the Nikkei 225 at 18,909.3 (down 1.1% MoM). In terms of sector performance, 11 out of 33 sectors gained. The best five performers were miscellaneous manufacturing, precision instruments, oil, electricals and utilities, while the worst five performers were steel, real estate, banks, insurance and securities. Small stocks fared well with the TSE-2, Nikkei JASDAQ and TSE Mothers index all outperforming the TOPIX, advancing 5.7%, 1.9% and 1.1% MoM respectively.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 31 March 2017 went down 3.1% compared with that of 28 February, while the TOPIX declined 1.5% during the same period. The Fund put no new names into the portfolio with no stocks sold out.

At present, the market’s attention is focused on whether or when clarity regarding Trump’s policies will be presented, as well as when these can be expected to be implemented. In that regard, investors need to wait until May for a clearer picture regarding Mr Trump’s policies as it is expected that he will launch tax reforms and infrastructure spending plans. The Investment Adviser hopes that the President will be able to convince or compromise with Congress, so that US economic growth will be lifted, as both sides of the house have the same goal of delivering a strong America. In turn, this would contribute towards further global economic growth and increased political stability around the world.

On the economic front, recent data pointed to the Japanese economy gathering strong momentum. Industrial production in February rose 2.0% MoM, better than market consensus of up 1.2% MoM. The government estimates that industrial production in March will decline 2.0% MoM, but it will rise 8.3% MoM in April. April’s figure looks too strong, but it may at least suggest that the Japanese economy is entering a higher growth phase as the large fiscal stimulus package of JPY 28.1 trillion, legalized in October 2016, has just started to feed through to the economy. Some economists calculate that the package’s impact on GDP growth would be 0.7% in FY2017, and 0.9% in FY2018 on top of the underlying trend of 1.0-1.5% growth. The jobless ratio in February declined to 2.8% from 3.0% in January, the lowest since June 1994. Core CPI (excl. fresh food) in February rose 0.2% YoY, the second consecutive month of positive growth. The Investment Adviser believes the deflationary stage in Japan is clearly over, as the service costs of many items are scheduled to be raised, and part time workers’ labour costs per hour are rising. Capital expenditures are inevitably expanding in many industries to combat the intensifying labour shortage. Corporate profits for FY2016 will start being announced from late April, and these should suggest profits are much better than previous estimates, and that shareholder returns (dividends and share buy-backs) are going to rise. May or June should be a great turning point for investors to switch to a more positive stance.

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 12/04/17 and are based on internal research and modelling.