smam stock market outlook monthly...2016/11/28 · japanese stock market outlook smam monthly...
TRANSCRIPT
Japanese Economy
SMAM revised GDP growth forecast for both FY2016 and FY2017 upward by +0.2% due to stronger than expected recent statics and considering pro-economic growth policies expected by Trump presidency. Forecast for Industrial Production in FY2017 was revised to robust +3.3% from the previous forecast of +2.7%.
• TPP is going to be scrapped at the hands of the Trump presidency, a significant blow to PM Abe’s growth strategy. China is
by far the largest counterpart of US trade deficit, however, extremely hawkish trade policy by US could still dent NAFTA
countries, Japan, EU and emerging economies.
• Bond yields have sharply spiked almost globally after the US election results in November, which caused steepening of yield
curves. Japanese government bond is also facing upward pressure on JGB yields, which Bank of Japan is trying to contain
by intervening in the JGB market. Bank of Japan has placed an unlimited amount of JGB purchasing order at fixed rate for
the first time on Nov. 17th.
Japanese Stock Markets
Trump honeymoon rally is going on in equity markets of advanced economies and US$ inspired by anticipated pro-business and pro-economic-growth policies. This trend could continue until the inauguration of US President Trump in January 2017. After starting Trump presidency, confrontational foreign policies and effects on global financial markets are going to be evaluated.
• Japanese equities will be supported by improving fundamentals in the long-term. Industrial production is gaining strength
and private consumption is recovering. Corporate earnings momentum has turned upward in Jul-Sep quarter. Japanese
companies are assuming around 102 USD/yen for FY2016, which is lower than current rate above 110 and could lead to
substantial earnings up-revisions going forward.
• Japanese government started tackling notoriously long working hours and inefficient working practices in Japan. This could
revive hope for social reform and PM Abe’s growth enhancing strategy, which virtually lost credibility among investors.
Executive summary
1
Notes: Macro and market views are as of Nov 16th and 18th , 2016 respectively, and subject to updates thereafter without notice
3
SMAM revised GDP growth forecast for both FY2016 and FY2017 upward by +0.2% due to stronger than
expected recent statics and considering pro-economic growth policies expected by Trump presidency.
CPI forecast for FY2017 was slightly up-revised from +0.3% to +0.5%.
Forecast for Industrial Production in FY2017 was revised to robust +3.3% from the previous forecast of +2.7%.
Notes: E=SMAM forecasts. SMAM views are as of Nov. 16th , 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 FY16-17
( YoY %)
Real GDP growth 0.9% 2.0% -0.9% 0.9% 0.9% 0.9%
Private Consumption Expenditure 1.7% 2.3% -2.9% -0.1% 0.6% 0.5%
Private Housing Investment 5.7% 8.8% -11.7% 2.4% 6.1% -0.1%
Private Capital Investment 0.9% 3.0% 0.1% 2.1% 0.4% 1.0%
Public Consumption Expenditure 1.5% 1.6% 0.1% 1.6% 1.2% 1.1%
Public Capital Investment 1.0% 10.3% -2.6% -2.7% 0.3% 5.5%
Net Exports (contrib. to GDP growth) -0.8% -0.5% 0.6% 0.1% 0.3% 0.2%
Exports -1.4% 4.4% 7.9% 0.4% 0.4% 2.3%
Imports 3.6% 6.8% 3.4% 0.0% -1.2% 1.2%
Nominal GDP 0.0% 1.7% 1.5% 2.3% 1.1% 1.3%
GDP Deflator -0.9% -0.3% 2.5% 1.4% 0.1% 0.4%
Industrial Production -2.7% 3.0% -0.4% -1.4% 0.9% 3.3%
CPI (excl. fresh food) -0.2% 0.8% 0.9% -0.0% -0.3% 0.5%
FY15 FY17EFY12 FY13 FY14 FY16E
4
Effects of Trump policies on Japan
Positives
• Expansionary economic policy such as fiscal spending and
tax reduction, to lift US and then global economic growth.
• Political gridlock is going to ease as the party of the
President Elect takes majority of both houses in US
Congress.
Negatives
• Global free trade could be hampered causing downward
pressure on global economic growth. TPP(Trans Pacific
Partnership) is now unlikely to be ratified by US.
• Spillover of “Populism” to Europe could cause harmful
effects on global economic growth.
Uncertain
• Policy toward Asia region: Policy of international trade and national security. Any wobbling of US-Japan alliance could be
negative. Seemingly successful first meeting between PM Abe and Mr. Trump on 17th November was positive.
• Whether US dollar strengthening, currently going on, can be admitted by Trump presidency.
• Whether political wheels of Trump presidency and US congress move in good tunes.
Global financial market has switched to “Risk-on” mode after the result of US election won by Mr. Trump.
Trump polices are pro-growth, pro-business and inflationary in US domestic side, which has boosted US stock
markets and bond yields.
Japanese stock market has received a tailwind meanwhile upward pressure on yields of Japanese government
bonds has been countered by Bank of Japan trying to keep yields low.
SMAM views as of Nov. 18th
5
How protectionist the US trade policy could become?
TPP is going to be scrapped at the hands of the Trump presidency, a significant blow to PM Abe’s growth
strategy.
China is by far the largest counterpart of US trade deficit, however, extremely hawkish trade policy by US could
still dent NAFTA countries, Japan, EU and emerging economies.
(Source) IMF, Bloomberg, compiled by SMAM
Counterparts US trade deficits in 2015 (USD mil) Share
1 China 337,014 43.8%
2 Mexico 89,259 11.6%
3 Germany 74,572 9.7%
4 Japan 62,798 8.2%
5 Canada 49,802 6.5%
6 Vietnam 30,214 3.9%
7 Ireland 29,029 3.8%
8 Italy 28,265 3.7%
9 Korea 27,616 3.6%
10 India 24,040 3.1%
Bank of Japan is facing a test of its “yield curve control” policy
Bond yields have sharply spiked almost globally after the US election results in November, which caused
steepening of yield curves.
Japanese government bond is also facing upward pressure on JGB yields, which Bank of Japan is trying to
contain by intervening in the JGB market. Bank of Japan has placed an unlimited amount of JGB purchasing
order at fixed rate for the first time on Nov. 17th.
6
0
0.5
1
1.5
2
2.5
3
US
Germany
Japan
Government Bond Yield Spread (10Y-2Y)(%)
Note: Weekly data from Jan. 10th, 2014 to Nov. 18th, 2016
(Source) Datastream
(Month/Year)
Inventory / shipment cycle shows the production has entered in an expansion phase
The chart is supposed to show anticlockwise movement.
YoY Inventory growth started to fall since March 2015 and has shifted to an expansion phase by crossing the 45
degree line from left to right.
7
Note: Data period from Jan. 2013 to Sep. 2016
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
-8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0
Inventory
(YoY %)
Shipment
(YoY %)
Apr. 2016
Jan. 2014
Sep. 2014
Inventory / shipment cycle chart for manufacturing industries
( 3 months moving average)
(Source) Ministry of Economy, Trade and Industry
Apr. 2015
Sep. 2016
Adjustment phase
Expansion phase
8
Wage keeps mildly rising in Japan
Since the beginning of 2015, regular wage payment has been mildly rising, which is supportive for consumer
sentiment and private consumption.
PM Abe has requested the industry leaders for raising regular wages at the Spring Wage Negotiation Rounds
for FY 2017.
(year) -3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9
2013 2014 2015 2016
Overtime etc
Bonus
Regular wage
Tot cash wage paymentYOY%
Cash wage payment and contribution by components(YOY %)
(Source) Ministry of Health, Labor and Welfare ( Month/Year)
Stock market outlook: What could happen after the current Trump honeymoon rally ?
SMAM short-term view Trump honeymoon rally is going on in equity markets of advanced economies and US$ inspired by anticipated
pro-business and pro-economic-growth policies. This trend could continue until the inauguration of US President Trump in January 2017. After starting Trump presidency, confrontational foreign policies and effects on global financial markets are going to be evaluated.
Longer-term outlook (6-months and beyond) Japanese equities will be supported by improving fundamentals in the long-term. Industrial production is
gaining strength and private consumption is recovering. Corporate earnings momentum has turned upward in Jul-Sep quarter. Japanese companies are assuming around 102 USD/yen for FY2016, which is lower than current rate above 110 and could lead to substantial earnings up-revisions going forward.
Note: SMAM’s projection is as of Nov. 18th,, 2016 and subject to updates without notice
10
700
900
1,100
1,300
1,500
1,700
1,900
Ja
n-1
4
Fe
b-1
4
Ma
r-1
4
Ap
r-1
4
Ma
y-1
4
Ju
n-1
4
Ju
l-1
4
Au
g-1
4
Se
p-1
4
Oct-
14
No
v-1
4
De
c-1
4
Ja
n-1
5
Fe
b-1
5
Ma
r-1
5
Ap
r-1
5
Ma
y-1
5
Ju
n-1
5
Ju
l-1
5
Au
g-1
5
Se
p-1
5
Oct-
15
No
v-1
5
De
c-1
5
Ja
n-1
6
Fe
b-1
6
Ma
r-1
6
Ap
r-1
6
Ma
y-1
6
Ju
n-1
6
Ju
l-1
6
Au
g-1
6
Sep-1
6
Oct-
16
No
v-1
6
De
c-1
6
Ja
n-1
7
Fe
b-1
7
Ma
r-1
7
Ap
r-1
7
Ma
y-1
7
Ju
n-1
7
Ju
l-1
7
Au
g-1
7
Sep-1
7
Oct-
17
No
v-1
7
De
c-1
7
TOPIX
Forecast range upside
Forecast range downside
TOPIX index forecast range by SMAM
(Source) TOPIX: Tokyo stock exchange, Forecast by SMAM
(Points)
(Month/Year)
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 growth to gradually recover from the negative shock of stronger yen.
• Fiscal stimulus and further monetary easing will be made to sustain economic growth in Japan.
Upside Risks include:
• Stronger-than-expected global growth.
• Stronger-than-expected measures by the Abe government.
Downside Risks include:
• Confrontational foreign policies taken by Trump presidency shake global trades and deepen geo-political
tensions.
• Populism gains in Europe further stabilizing EU.
• Unexpectedly large impact from the process of US monetary policy normalization.
• Concern over emerging economies including China.
11
SMAM’s forecasts as of November 2016
12
Sharp strengthening of US$ has made US equities as the single winner in US$ terms
12
After the US presidency election won by Mr. Trump, US$ has strengthened quite substantially. Comparing
major equity markets in US$ terms, US is the only market to have gained in November as of 24th.
Even solid rise in TOPIX in yen terms has not been enough to compensate sharp decline of yen against US
dollars. Emerging market equities are suffering from cash outflow.
It is still uncertain how far this strong US$ can be sustained considering hawkish trade policy expected from
Trump presidency.
70
75
80
85
90
95
100
105
110
115
120 MSCIEM/US$
S&P500
TOPIX/US$
MSCIEurope/US$
TOPIX/Yen
US$ based performance of stock markets (Dec 2015 =100)
(Source) Datastream, MSCI and Tokyo Stock Exchange, compiled by SMAM.
Notes: Month-end data from Dec 2015 to Oct 2016. Nov. 2016 data is as of 24th.
(Month/Year)
Political stability is an valuable asset for Japan
Approval rating for PM Abe’s cabinet was 55% in November, which was comfortably high when many countries
are suffering political instabilities.
Japanese government started tackling notoriously long working hours and inefficient working practices in Japan.
This could revive hope for social reform and PM Abe’s growth enhancing strategy, which virtually lost credibility
among investors.
13
0
10
20
30
40
50
60
70
80
90
Aug-9
8
Feb
-99
Aug-9
9
Feb
-00
Aug-0
0
Feb
-01
Aug-0
1
Feb
-02
Aug-0
2
Fe
b-0
3
Aug-0
3
Feb
-04
Aug-0
4
Feb
-05
Aug-0
5
Feb
-06
Aug-0
6
Feb
-07
Aug-0
7
Feb
-08
Aug-0
8
Fe
b-0
9
Aug-0
9
Feb
-10
Aug-1
0
Feb
-11
Aug-1
1
Feb
-12
Aug-1
2
Feb
-13
Aug-1
3
Feb
-14
Aug-1
4
Feb
-15
Aug-1
5
Feb
-16
Aug-1
6
Obuchi
Mori
Koizumi
Abe 1
Fukuda
Aso
Hatoyama
Kan
Noda
Abe 2
Approval ratings of Japanese cabinets by Prime Ministers(%)
(Source) NHK
Nov. 55%
Apl. 42%
Current Abe
(Month/Year)
Earnings momentum keeps improving
12M EPS forecast continues improving with the latest leading of 101 for TOPIX in November.
10.1% of 12M forward EPS growth is forecast .
14
%
(month/ year)
92
101
10.1%
0%
10%
20%
30%
40%
50%
60%
70%
0
20
40
60
80
100
120
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
IBES EPS consensus forecast for TOPIX
Historical EPS (left) 12M Forward EPS forecast (left) 12M forward forecast growth (right)
Note: Weekly data from Jan. 4th 2011 to Nov. 15th 2016.
(Source) Datastream, IBES
(Points)
(Month/Year)
PER is in the lower half of the range for the current PM Abe’s tenure
Since Abenomics started, PER for Japanese stock market, TOPIX index-wise, has been in a range between 12x
and 16x except for temporary overshooting.
As of October 14th, PER for TOPX was 13.64x whereas comparative PER for S&P 500 was over 16x. Relative
valuation of Japanese stocks looks attractive compared to US stocks.
15
300
500
700
900
1,100
1,300
1,500
1,700
1,900
Oct-
07
De
c-0
7F
eb
-08
Apr-
08
Ju
n-0
8A
ug-0
8O
ct-
08
De
c-0
8F
eb
-09
Ap
r-0
9Ju
n-0
9A
ug-0
9O
ct-
09
De
c-0
9F
eb
-10
Ap
r-1
0Ju
n-1
0A
ug-1
0O
ct-
10
De
c-1
0F
eb
-11
Ap
r-1
1Ju
n-1
1A
ug-1
1O
ct-
11
De
c-1
1F
eb
-12
Ap
r-1
2Ju
n-1
2A
ug-1
2O
ct-
12
De
c-1
2F
eb
-13
Apr-
13
Ju
n-1
3A
ug-1
3O
ct-
13
De
c-1
3F
eb
-14
Ap
r-1
4Ju
n-1
4A
ug-1
4O
ct-
14
De
c-1
4F
eb
-15
Ap
r-1
5Ju
n-1
5A
ug-1
5O
ct-
15
De
c-1
5F
eb
-16
Ap
r-1
6Ju
n-1
6A
ug-1
6O
ct-
16
Note: Data is weekly from Oct. 26th 2007 to Nov. 11th 2016. TOPIX was 1378.28 at the end of the period. (Source) Tokyo Stock Exchange, Datastream and IBES, compiled by SMAM
TOPIX
(Month/Year)
TOPIX and PER based on 12-month forward EPS
16x
12x
13x
14x
15xPM Abe's 2nd term started
Foreign investors turned purchasing Japanese equities from October this year
Short covering by foreign investors after the US election ignited the recovery of Japanese stock prices.
Domestic investors have been selling Japanese equities so far except for constant share buybacks by business
corporations.
16
(month/ year)
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 Mar Apr May Jun July Aug Sep Oct Nov
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 exchange up to Nove. 11th 2016.
2016 (Month/Year)
17
Overseas investors money is flowing back to Japanese equities
17
Arbitrage positions of “Long cash equity/Short futures” is referred to as an indicator of activities by overseas
investors, mainly short-term ones.
The outstanding position continued to decline since the beginning of this year, however, started to accumulate
from the middle of September.
8,000
10,000
12,000
14,000
16,000
18,000
20,000
22,000
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
Outstanding arbitrage positions: Long cash equities /Short futures
Outstanding arbitrage positions (right) Nikkei 225 index (left)
(yen mil)
(Year/Month/Day)Note: Daily data from Nov. 18th 2014 to Nov. 17th 2016.(Source) Japan Exchange Group.
18
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