Japanese Stock Market Outlook
SMAM monthly comments & views - March 2016 -
Japanese Economy
The global negative head wind continues and Japanese economy is starting to show some fragilities notably in manufacturing sectors. Private consumption was weak in 4Q 2015 partly affected by a warm winter. On the other hand, private capital investment shows resilience especially in non-manufacturing sectors.
• Japanese financial systems are trying to adjust to the new regime of negative interest rate. It requires some time for
judging if this new easing policy could actually stimulate the economy as BOJ intends or confuses financial systems and
economy. Interest rate for individuals would not become negative yet due to the guidance by the government to
financial institutions.
• Strong employment is supportive for the consumers, however, wage increase has not been large enough to stimulate
private consumption. Spring wage negotiation round is currently going on, which could be rather disappointing as
global economic slowdown makes companies more conservative.
Japanese Stock Markets
Lots of variables remain for a considerable time such as US interest rate policy, unfolding effects of negative interest rates in Japan and further monetary & fiscal policies possibly taken by global authorities. Japanese stock market is expected to move within a wide box range with high volatility for the short term.
• Since Abenomics started, PER for Japanese stock market, in TOPIX index, has been in a range between 12.5x and 16x.
The recent low of 1196.28 in TOPIX reached on 12th February seems at oversold level. At 1180 in TOPIX, PBR is 1.0
times and some downside protection could start to work under this level.
• Due to accumulating cash and low share prices, large share buybacks have been announced by companies, which is
surely positive for the stock market in the long run. Negative interest rate should make it even harder for companies to
justify huge amount of idling cash.
Executive summary
1
Notes: Macro and market views are as of Feb.15th and 17th 2016 respectively, and subject to updates thereafter without notice
Outlook for Japanese Economy
2
3
GDP forecast was downgraded for FY2015 and FY2016 both from +1.0%. Private consumption has been
weaker than previously forecast whereas private capital investment was revised upward due to recent
solidness.
Preliminary forecast was set for FY2017 and this weak forecast was due to estimated aftershock of
consumption tax hike scheduled in April 2017. There is a possibility for postponing this tax hike again if
sluggishness continues for Japanese and global economies.
Notes: E=SMAM forecasts. SMAM views are as of Feb. 15th, 2016 and subject to updates thereafter without notice Source: Cabinet Office, Bank of Japan, Ministry of Economy, Trade and Industry, Ministry of Internal Affairs and Communications, SMAM forecasts
(%, YoY except Net Exports)
SMAM economic outlook for FY15-17
Real GDP growth 0.9% 2.0% -1.0% 0.8% 0.9% -0.2%
Private Consumption Expenditure 1.7% 2.3% -2.9% -0.3% 1.2% -0.7%
Private Housing Investment 5.7% 8.8% -11.7% 2.1% 2.1% -3.9%
Private Capital Investment 0.9% 3.0% 0.1% 2.2% 2.6% -1.3%
Public Consumption Expenditure 1.5% 1.6% 0.1% 1.3% 1.0% 0.8%
Public Capital Investment 1.0% 10.3% -2.6% -1.3% -1.6% 0.3%
Net Exports (contrib. to GDP growth) -0.8% -0.5% 0.6% 0.1% 0.0% 0.2%
Exports -1.4% 4.4% 7.8% 0.6% 2.7% 2.9%
Imports 3.6% 6.7% 3.3% 0.1% 3.1% 1.7%
Nominal GDP 0.0% 1.7% 1.5% 1.9% 0.9% 0.9%
GDP Deflator -0.9% -0.3% 2.5% 1.1% -0.1% 1.2%
FY15E FY17EFY12 FY13 FY14 FY16E
4
GDP in 4Q 2015 was -0.4% QoQ, which was -1.4% annualized. Private consumption detracted by -0.8% QoQ,
for which warm weather was partly blamed for weak consumption on winter clothes and other seasonal items.
Private capital investment is a bright spot with QoQ growth of +1.4%. in 4Q.
SMAM economic outlook for FY15-16
Notes: SMAM views are as of Feb.15th, 2016 and subject to updates thereafter without notice. Source: Cabinet Office, Ministry of Economy, Trade and Industry, Ministry of Internal Affairs and Communications, SMAM forecasts .
-20
-15
-10
-5
0
5
10
13Q1 Q2 Q3 Q4 14Q1 Q2 Q3 Q4 15Q1 Q2 Q3 Q4 16Q1 Q2 Q3 Q4 17Q1
Private Consumption
Private Housing Investment
Private Capital Investment
Public Investment
Others
Net Export
Real GDP
Forecast by SMAM
(QoQ % annualized) Real GDP and contribution by components
Industrial production is recovering though estimate for 1Q 2016 might be optimistic
Industrial production has been rather resilient considering slowing-down global economies.
Estimated index tends to be optimistic from the recent experience and 1Q 2016 could be revised downward.
5
-1.4%-1.2%
0.5%
3.9%
-4 %
-3 %
-2 %
-1 %
0%
1%
2%
3%
4%
5%
6%
7%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
12 13 14 15 16
Others
Material
Transportation equipment
Machinery
IT goods
Total Industrial Production
Industrial Production Index and contribution by sectors
(Source) Ministry of Economy, Trade and Industry
(QoQ %)
Note: Estimated Index from Jan. 2016 are used.
Estimated index from Jan. 2016.
6
Machinery orders from non-manufacturing industries show resilience
Manufacturing industries are negatively affected by global economic slowdown.
Appetite for capital investment in non-manufacturing industries stays high, which is also witnessed in this
statistics. Transportation sector is making the largest contribution for the recent machinery orders.
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
6,000
1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112
12 13 14 15
(00' million yen)
Machinery orders from Non-manufacturing and Manufacturing industries
(Source) Cabinet Office
Note: *Green lines are 3 month moving average for each data.Non-manufactuing excludes ship builiding & electric power.
Non-manufacturing
Manufacturing
7
Consumers sentiment has been rather weak since last summer despite strong employment
Consumer sentiment declined last summer due to such negative factors as rising prices and rainy weather, and
then global economic slowdown and falling stock prices.
Strong employment is supportive for the consumers, however, wage increase has not been large enough to
stimulate private consumption. Spring wage negotiation round is currently going on, which could be rather
disappointing as global economic slowdown makes companies more conservative.
30
35
40
45
50
55
60
65
Jan
Ma
r
Ma
y
Jul
Se
p
Nov
Jan
Ma
r
Ma
y
Jul
Se
p
Nov
Jan
Ma
r
Ma
y
Jul
Se
p
Nov
Jan
Ma
r
Ma
y
Jul
Se
p
Nov
Jan
Mar
Ma
y
2012 2013 2014 2015 2016
Economy Watchers DI (for future conditions)
Employment
Household activity
Notes: Diffusion indices of "Economy Watchers Survey". DI above 50 means condition is expected to improve.Source: Cabinet Office
8
Regular wage increase is a supportive but not fast enough to offset inflation
Regular wage has been increasing since the beginning of 2015, which is encouraging.
When inflation was adjusted, real wage for 2015 slightly declined though it could have been distorted by large
decline of bonuses in June 2015, for which statistical error caused by changing sample families was a possibility.
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112
12 13 14 15
Overtime etc
Bonus
Regular wage
Tot cash wage payment YOY%
Cash wage payment and contribution by components(YOY %)
(Source) Ministry of Health, Labor and Welfare
Outlook for Japanese Stock Markets
9
Stock market outlook: waiting for a confirmation of global economic recovery
SMAM short-term view Uncertainties surrounding the stock market will linger for some time, Chinese economy, Oil price, US slowdown,
strong yen, possible earnings setback and so on. Japanese stock market is expected to move within a wide box range with high volatility for the short term.
Longer-term outlook (6-months and beyond) Lots of variables remain for a considerable time such as US interest rate policy, unfolding effects of negative
interest rates in Japan and further monetary & fiscal policies possibly taken by global authorities. When global uncertainties are gradually cleared, especially the Chinese economy, the Japanese stock market
will make recovery and start to build grounds for the upside trial.
Note: SMAM’s Projection is as of Feb. 17th 2016 and subject to updates without notice
10
700
900
1,100
1,300
1,500
1,700
1,900
No
v-1
2
De
c-1
2
Jan-1
3
Feb
-13
Ma
r-1
3
Apr-
13
Ma
y-1
3
Jun-1
3
Jul-1
3
Aug-1
3
Sep-1
3
Oct-
13
No
v-1
3
De
c-1
3
Jan-1
4
Feb
-14
Ma
r-1
4
Apr-
14
Ma
y-1
4
Jun-1
4
Jul-1
4
Aug-1
4
Sep-1
4
Oct-
14
No
v-1
4
De
c-1
4
Jan-1
5
Feb
-15
Ma
r-1
5
Apr-
15
Ma
y-1
5
Jun-1
5
Jul-1
5
Aug-1
5
Sep-1
5
Oct-
15
No
v-1
5
De
c-1
5
Jan-1
6
Feb
-16
Ma
r-1
6
Apr-
16
Ma
y-1
6
Jun-1
6
Jul-1
6
Aug-1
6
Sep-1
6
Oct-
16
No
v-1
6
De
c-1
6
TOPIX
Forecast range upside
Forecast range downside
TOPIX index forecast range by SMAM
(Source) TOPIX: Tokyo stock exchange, Forecast by SMAM
(Points)
Base scenario & Upside / Downside risks for our forecasts
Our Base Scenario is assuming the following views:
• Global economy does not enter into a recession.
• Japan’s private consumption to grow mildly supported by wage growth.
• Japanese corporate earnings keep growing at higher pace than in peer countries.
• Reflationary policy to be continued toward the next consumption tax hike.
Upside Risks include:
• Stronger-than-expected global growth.
• Stronger-than-expected measures by Abe government.
Downside Risks include:
• Unexpectedly large impact from the process of US monetary policy normalization.
• Concern over emerging economies including China.
• Falling oil price causes disastrous problem for oil producing countries.
• Increasing geopolitical concerns.
11
12
According to IBES, analysts are forecasting EPS to grow by 11.9% in the 12 months forward, however,
downward revision will be made.
Global economic slowdown and strong yen are weighing on companies. According to Nikkei
newspaper, Apr-Dec 2015 recurring profit grew +5.9% YOY. Profit forecast by companies for entire
FY2015 was to grow by +2.3% for all listed companies having fiscal year end in March excl. financials.
Profit forecast by companies could be a little conservative, however, uncertainty for the corporate
earnings could undermine the reliability of stock valuations.
Earnings growth is expected to continue for Japan
98
109
11.9%
0%
10%
20%
30%
40%
50%
60%
70%
0
20
40
60
80
100
120
11/01 12/01 13/01 14/01 15/01 16/01
IBES EPS consensus forecast for TOPIX
Historical EPS (left) 12M Forward EPS forecast (left) 12M forward forecast growth (right)
Up to Feb 15th, 2016(Source) Datastream, IBES
0
10
20
30
40
50
60
70
80
90
100
0
2
4
6
8
10
12
14
16
18
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
(%)(JPY tn) Dividend payments & Share buyback by listed firms
Share Buyback Total(LHS)
Aggregate Dividends(LHS)
Total Shareholders Return(RHS)
Notes : For ordinary shares of listed firms excluding lossmakers or subsidiariesSource : Toyo Keizai, Quick, I-N Information Systems, Daiwa Securities forecasts
13
Increasing share buybacks should be supportive for the share prices in the long term
13
Due to accumulating cash and low share prices, large share buybacks have been announced by companies,
which are surely positive for the stock market in the long run.
Negative interest rate should make it even harder for companies to justify huge amount of idling cash.
Forecast
Current PER indicates the stock prices have already discounted lots of pessimism
Since Abenomics started, PER for Japanese stock market, in TOPIX index, has been in a range between 12.5x
and 16x. The recent low of 1196.28 in TOPIX seems at oversold level.
At 1180 in TOPIX, PBR is 1.0 times and some downside protection could start to work under this level.
14
300
500
700
900
1,100
1,300
1,500
1,700
1,900
Ja
n-0
7M
ar-
07
Ma
y-0
7Ju
l-0
7S
ep-0
7N
ov-0
7Ja
n-0
8M
ar-
08
Ma
y-0
8Jul-0
8S
ep-0
8N
ov-0
8Ja
n-0
9M
ar-
09
Ma
y-0
9Ju
l-0
9S
ep-0
9N
ov-0
9Ja
n-1
0M
ar-
10
Ma
y-1
0Ju
l-1
0S
ep-1
0N
ov-1
0Ja
n-1
1M
ar-
11
Ma
y-1
1Ju
l-1
1S
ep-1
1N
ov-1
1Ja
n-1
2M
ar-
12
Ma
y-1
2Ju
l-1
2S
ep-1
2N
ov-1
2Ja
n-1
3M
ar-
13
Ma
y-1
3Ju
l-1
3S
ep-1
3N
ov-1
3Ja
n-1
4M
ar-
14
Ma
y-1
4Ju
l-1
4S
ep-1
4N
ov-1
4Ja
n-1
5M
ar-
15
Ma
y-1
5Jul-1
5S
ep-1
5N
ov-1
5Ja
n-1
6M
ar-
16
Notes: TOPIX: calender year and week-end, P/E ratio is based on 12-month forward EPS of IBESSource: TOPIX: Tokyo Stock Exchange, 12 month forward EPS of IBES: SMAM
TOPIX
Data is up to Feb. 12th 2016 when TOPIX was 1196.28.
TOPIX and PER based on 12-month forward EPS
16x
12x
13x
14x
15xPM Abe's 2nd term started
Short term investors such as hedge funds seem to be taking a heavy short positions
Cash & carry arbitrage position is the amount of cash shares bought as a paring with short positions in
derivatives. It is regarded as an indicator for activities of short term investors such as hedge funds.
After the turn of the year, this arbitrage position has declined sharply, which indicates short term investors are
heavily selling Japanese equities using derivatives.
15
8,000
10,000
12,000
14,000
16,000
18,000
20,000
22,000
0
1,000
2,000
3,000
4,000
5,000
6,000
Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16
Cash and Carry Balance and Nikkei Average
C&C Balance (JPY bn, LHS) Nikkei Avg. (JPY, RHS)
(Source) BloombergUp to Feb. 12th, 2016
(yen billion) (yen)
500
700
900
1100
1300
1500
1700
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
Net purchasing of Japanese equities by investor type
Foreign Trust bank Individual Inv. Trust Fund Business corp TOPIX
2015
TOPIX (points)
Bar charts (Yen billion)
(Source) Japan Exchange Group
Note: Data is for Tokyo stock exchange and Nagoya stock exchangeUp to Feb. 12th 2016
2016
Supply-Demand balance: Foreign investors selling is pulling the stock prices down
Foreign investors have sold 2.2 trillion yen of Japanese listed shares this year out-powering domestic investors’
purchasing.
In the exchange traded futures, foreign investors sold 1.2 trillion yen in January, however, bought approx. 1
trillion yen in February up to 12th.
16
Could negative interest rate cause shift in huge household assets in Japan?
In Japan, as much as 53% of huge household assets are held in cash and deposits with minimal yields.
Interest rate for individuals would not become negative yet due to the guidance by the government to financial
institutions, however, individuals might start looking for more yield for their assets.
On the other hand, if negative interest rate confuses financial systems and uncertainty deepens, individuals
could be discouraged to take risks for their savings.
17
53%
14%
34%
2%
5%
4%
5%
13%
9%
10%
34%
17%
26%
32%
33%
4%
3%
3%
0% 20% 40% 60% 80% 100%
Japan
Unites States
Euro area
Currrency & deposites Bonds Investment trusts
Shares & equities Insurance & pension reserves Others
Household financial assets breakdown
Note: Data for Japan & US is Sep. 2015 and for Euro area, Jun. 2015.(Source) Bank of Japan
Total1,684 trillion yen
Total68.9 trillion dollars
Total21.7 trillion euro
18
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