The timing of the BoJ’s policy change expected in the short term

BY YUTAKA UDA

Monthly Fund Commentary
26 Jan 2018

BY YUTAKA UDA

​In December, the Japanese stock market increased for the fourth consecutive month with the Nikkei 225 closing the month at 22,764.9 (up 0.2% MoM) and the TOPIX finishing at 1,817.6 (up 1.4% MoM).

Market sentiment was subdued in early December, amid concerns regarding geopolitical risks and US political turmoil. On 6 December, the Nikkei 225 fell 445 points (its largest single-day decline in 2017), following reports that President Trump will recognise Jerusalem as Israel’s capital and relocate the US embassy to the city and subsequent fears of heightened unrest in the Middle East. However, this decline was followed by a sharp rebound of Japanese stocks on the back of US stock gains and a yen depreciation against the US Dollar on 8 December.

During the month, finalised financial regulations associated with Basel 3 lead US long-term interest rates higher. Expectations of an improving operating environment fuelled the buying of banking stocks. The Japanese market continued to rise in response to news of an upward revision of the Japanese GDP growth rate for Q3.

On 15 December, the Republican Party’s bill to slash the US federal corporate tax rate from 35% to 21% was finalised. WTI crude oil closed the month at 60.4 $/bbl, having risen from 57.4 $/bbl at the beginning of the month, while the US dollar ended the month at 112.7 against the yen, having started the month at 112.5.

In terms of sector performance, 27 out of the TSE 33 sectors gained. Resource related sectors achieved notable gains following increased commodity prices such as crude oil and copper. The five best performers were oil, mining, commerce (mainly trading companies), pulp & paper and air transportation. On the other hand, the information & communications sector was badly hit, following the news that Rakuten would become a mobile phone carrier, raising the prospect of increased competition. The five worst performers were information & communications, miscellaneous manufacturing, utilities, miscellaneous finance and electricals.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 29 December 2017 went up 3.4% compared with that of 30 November, while the TOPIX rose 1.4% during the same period. The Fund put no new names into the portfolio with no stocks sold out.

Global economic growth has been gathering strong momentum from mid 2017 onwards, a trend the Investment Adviser expects to continue through to the end of 2018. There is a clear global investment trend recognisable from bonds to equities.

In Japan, GDP growth for Q3 2017 was revised up from 1.4% to 2.5% QoQ (annualised), recording the second consecutive above 2% QoQ (annualised) growth. GDP growth in Q1 2017 was also revised up from 1.0% to 1.5% QoQ (annualised), while Q2 growth was revised up from initially 2.6% to 2.9%.

In November, industrial production rose 0.6% MoM, with shipments increasing 2.4% MoM and inventories declining 1.0% MoM. The government raised its overall assessment of production from “continues to show an upward movement” to “is picking up”. The government forecasts that industrial production will rise 3.4% MoM in December and decline 4.5% MoM in January 2018 respectively.

In November, retail sales rose by 1.9% MoM, rebounding from a decline of 0.1% MoM in October, following the negative impact of typhoons and other factors. During the month, nationwide core CPI (excl. fresh food) increased to 0.9%, from 0.8% in October, indicating that the CPI may reach 1.0% within the next few months.

Against this backdrop, the Bank of Japan (BoJ) decreased some of its long-dated bond purchases on 10 January 2018, stoking speculation that the Bank may change its monetary easing policy, resulting in a rally of the yen against the US dollar from 113 to 110. The Investment Adviser thinks that this rally should be short lived as the real interest rate differential between the US and Japan is likely to widen towards the end of 2018.

On 22 January an ordinary Diet session will commence in Japan, with the supplementary budget of JPY 2.8 trillion expected to be discussed and legalised as a priority. This in turn should encourage investors further, increasing confidence regarding the economic outlook and stock market. Although the BoJ may officially keep its “extremely easing“ monetary policy, the timing of the bank’s policy change is now expected in the short term, and the time for investors to recognise “Japan being back to normal” is imminent.

The Investment Adviser wants to reiterate that the Japanese stock market should rally in 2018 as equity valuations should shift from a comparatively low level under a deflationary environment (i.e. PER 10-15x) to valuations reflecting a stabilising economy (PER 15-20x). Economic sensitive stocks such as banks, machinery and cyclical sectors should lead the rally.

The Fund is increasing its allocation to the machinery and IT service sectors with the conviction that capex will expand due to the increasingly serious labour shortage and potential capacity constraints. Cyclical sectors such as steel, nonferrous metals, and chemicals together with energy are also targeted for higher exposure. The Fund retains a 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 12/01/18 and are based on internal research and modelling