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Japanese Stock Market Outlook
SMAM monthly comments & views - August 2015 -
Japanese Economy
Japan’s economic recovery is on track, as robust Exports and Industrial Production lead the moderate growth. Meantime, faltering Consumption is likely to recover on higher nominal wages gain.
• SMAM cut real GDP forecast from +1.6% to +1.5% in FY2015 and from +1.9% to +1.8% in FY2016.
• Exports and Industrial Production in April-June are expected to grow at slower pace, and accelerate from 2H
2015 alongside moderate global recovery.
• Private Consumption data shows still soggy, however Consumption will accelerate from July-September led by
higher nominal wages growth.
• SMAM raised Core-CPI forecast from +0.2% to +0.3% for FY2015 and maintained at +1.1% for 2016, which is
far below the inflation forecast by BOJ (+0.7% for FY2015 and +1.9% for FY2016), but the bank is less likely to
move to additional easing.
Japanese Stock Markets
Current stocks are fairly valued on upbeat corporate earnings. There would be still some room for upward revision in profit forecast based on current currency rates.
• FY2015 corporate profits are expected to be revised upward due to weak JPY.
• Overseas investors were accumulating Japanese equities.
• Downside risk is associated with foreign factors such as geopolitical concerns, uncertainties surrounding
monetary policy by Fed and ECB, and possibly negative effects by crude oil price slump.
Executive summary
1
Notes: Macro and market views are as of July 16th and 22th, 2015 respectively, and subject to updates thereafter without notice
Outlook for Japanese Economy
2
3
SMAM cut real GDP forecast from +1.6% to +1.5% for FY2015 and from +1.9% to +1.8% for FY2016.
Net Exports forecast for FY2015 were revised downward from +0.3ppt to +0.2ppt on weak Exports in April-
June quarter. Industrial Production forecasts were also downgraded from +2.3% to +0.7% for FY2015 and from
+3.7% to +3.5% for FY2016.
Notes: E=SMAM forecasts. SMAM views are as of July 16th, 2015 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 FY15-16
Real GDP growth 1.0% 2.1% -0.9% 1.5% 1.8%
Private Consumption Expenditure 1.8% 2.5% -3.1% 1.4% 2.0%
Private Housing Investment 5.7% 9.3% -11.7% 1.3% 4.4%
Private Capital Investment 1.2% 4.0% 0.4% 3.5% 3.2%
Public Consumption Expenditure 1.5% 1.6% 0.4% 0.7% 0.5%
Public Capital Investment 1.0% 10.3% 2.0% -3.3% -1.6%
Net Exports (contrib. to GDP growth) -0.8% -0.5% 0.6% 0.2% 0.1%
Exports -1.4% 4.4% 8.0% 5.4% 5.0%
Imports 3.6% 6.7% 3.7% 4.9% 5.2%
Nominal GDP 0.1% 1.8% 1.6% 2.2% 2.4%
GDP Deflator -0.9% -0.3% 2.5% 0.8% 0.5%FY s tarting Apri l and ending March
FY12 FY13 FY14 FY16EFY15E
Quarterly GDP: Mid-to-high-1% growth after a strong growth in January-March
SMAM revised real GDP forecast downward from +0.8% to +0.5% for April-June.
The economy is likely to stay soft in April-June after the strong growth in January-March. SMAM expects the
economy to keep a mid-to-high-1% growth after a temporary softening in April-June on solid domestic demands
and recovery of Exports. Industry Production and Exports will recover from July-September led by US growth as
ISM data in US has been improving.
4
Notes: E=SMAM forecasts. SMAM views are as of July 16th, 2015 and subject to updates thereafter without notice Source: Cabinet Office, Ministry of Economy, Trade and Industry, Ministry of Internal Affairs and Communications, SMAM forecasts . The above data is as of July 16th, 2015. .
4.4
-6.8
-2.0
1.2
3.9
0.51.5 1.8 1.7 1.7 1.7 2.2 2.8
-25
-20
-15
-10
-5
0
5
10
15
1 2 3 4 1 2 3 4 1 2 3 4 1
14 15 16 17
Government Capital Investment
Government Expenditures
Private Consumption Expenditures
Private Housing Investment
Private capital Investment
Private Inventory Increases
Net Exports
Real GDP
Real GDP growth and Contribution by components(QoQ % annualized)
(Source) Cabinet Office, SMAM forecast
Forecast by SMAM
5
SMAM forecasts current recovery process in order from Exports to Production and Consumption. The ongoing
recovery is at the final stage of Consumption.
Exports and Industrial Production continue stable growth, and Consumption is eventually picking up.
April-June three data (IP, Exports and Consumption) show a respite in recovery.
SMAM expects Private Consumption Expenditures to recover from July-September quarter although current
consumption data remain weak. Wealth effect by rising stock prices and real wages growth will push the
Consumption higher.
Recovery Process: Exports⇒Production⇒Employment, Confidence⇒Consumption
90
92
94
96
98
100
102
104
106
108
110
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
12 13 14 15
Exports
Industrial Production
Consumption Expenditures
Exports, Industrial Production and Consumer Expenditures(YR2010=100)
(Source) Ministry of Economy, Trade and Industry, BOJ, Cabinet Office, SMAM seasonally adjusted*1: Industrial Production for 2Q 2015 i s estimated based on the data of Industrial Production Forecast Index.
Forecast by SMAM
Wages: Basic Wages keep growing
Basic wages continue increasing at a moderate pace. Pay scale increase by “Shunto negotiation” accelerate the
wages growth from June.
SMAM expects Basic wages to grow at +0.7% YoY and total nominal wages to grow +1.1% in FY2015.
6
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5
07 08 09 10 11 12 13 14 15
Employers, more than 5 employees
Basic Wage growth(%, YoY)
(Source) Ministry of Health, Labour and Welfare, SMAM
0.0
1.0
2.0
3.0
4.0
5.0
6.0-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Basic wages growth (LHS)
Pay scale increase (LHS)
Unemployment rate (RHS)
(Basic wages growth, Pay scale increase, %)
Basic wages growth (YoY), Pay scale increase (YoY) and Unemployment rate
SMAM Forcast
(Unemployment rate, %)
(Source) Ministry of Health, Labour and Welfare, SMAM (Up to 2016)
Wages: Pay increase will push incomes higher
Wages are expected to continue growing as job market remains tight and labor resource remains limited to grow.
Wages gain will push up incomes and this will support Private Consumption Expenditures (PCE) to recover.
SMAM expects PCE to contribute to the GDP growth largely in FY2015 and 2016.
7
-2%
-1%
0%
1%
2%
3%
4%
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
12 13 14 15
Contribution by Labor Popuration (3month MA)
Contribution by Total Cash Earnings (3month MA, YoY)
Total Cash Earnings Growth (monthly, YoY)
Total Cash Earnings Growth (3month MA, YoY)
(Note) Data of thelatest quarter is based on average of data for latest months.
(Source) Ministry of Health, Labour and Welfare, SMAM
Wages Growth and Labor Popuration Growth (YoY)(YoY)
Forecast by SMAM
-2.0
1.2
3.9
0.5
1.51.8 1.7
-4
-3
-2
-1
0
1
2
3
4
5
6
3 4 1 2 3 4 1
15 16
Private Consumption Expenditures
Private Housing Investment
Private capital Investment
Others
Net Exports
Real GDP
Real GDP growth and Contribution by components(QoQ % annualized)
(Source) Cabinet Office, SMAM forecast
Forecast by SMAM
Private Consumption: Anemic Private Consumption in April-June
Private consumption data on a 3 month MA basis showed anemic recovery until April-June. Private
Consumption Index, Household Survey and Retail Sales in April-June lost 0.5%, 2.4% and 0.7% respectively.
However SMAM expects PCE to maintain +0.2% growth in April-June with a recovery in month by month (see
next page).
8
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
10 11 12 13 14 15
Private Consumption Index
Survey of Household Economy (after household # adjusted)
Retail Sales (Real)
Real Privete Consumption of GDP Data
(Note) Data of thelatest quarter is based on average of data for latest months.(Source) Cabinet Office, Ministry of Economy, Trade and Industry, SMAM
Private Consumption Data (3 month MA basis, YoY)
9
Private Consumption: Monthly data show “Recovery”
Monthly PCE data shows a sign of recovery. Both of Private Consumption Index and Retail sales rose in May.
New Car Sales have been bottoming out since January. SMAM expects PCE to resume growing at faster pace
from July-September.
-40%
-20%
0%
20%
40%
60%
80%
100%
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
12 13 14 15
Mini Cars
Passenger Cars (mid-large)
New Car Sales
New Car Sales
(Source) Japan Automobile Dealers Association, Japan Mini Vehicles Association , SMAM
(YoY, %)
90
95
100
105
110
115
120
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
12 13 14 15
Index
Private Consumption Index
Retail Sales Index (Real)
(Note) Data of thelatest quarter is based on average of data for latest months.(Source) Cabinet Office, Ministry of Economy, Trade and Industry, SMAM
Private Consumption Data (Monthly, YoY)
Outlook for Japanese Stock Markets
10
Stock market outlook: Earnings growth prospects should help the stock market
SMAM short-term view
In addition to moderate growth in Production and Exports, Consumption recovery would lift the macro
economy. Corporate earnings are expected to continue double digit growth in FY2015.
The stock market is expected to keep advancing as Japan's reflation policy is very likely to continue until next
consumption tax hike in 2017. Increasing expectation for dovish US rate hike should also support the market.
Longer-term outlook (6-months and beyond) For longer-term, we continue to expect the market to track on a modest uptrend, underpinned by US-led global
growth, solid corporate earnings and strengthened reflationary policies in Japan. Investors are more likely to focus on earnings upward revision after April-June company reports.
Note: SMAM’s Projection is as of July 22th, 2015 and subject to updates without notice
11
500
700
900
1,100
1,300
1,500
1,700
1,900
2,100
Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16
Topix
Upside Range
Downside Range
TOPIX index range expectation by SMAM's Projection
(Source) TOPIX: Tokyo stock exchange, Upside and Downside range: forecasted by SMAM
(Points)
Upto September 2016
Base scenario & Upside / Downside risks for our forecasts
Our Base Scenario is assuming the following views:
• Global economic recovery to be sustained led by strong US economy
• Japan’s mild recovery from tax-hit weak demand buoyed by higher real wages growth
• Growing expectation for positive corporate earnings revisions due to weaker JPY
• 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:
• Slowdown in global economy
• Concern over global deflation
• Increasing geopolitical concerns
12
TOPIX / EPS forecast: Fairly valued on upbeat forward EPS
IBES consensus EPS continues rising supported by solid growth prospects. IBES 12 month and 18 month
forward EPS are JPY107.7 and JPY112.6 respectively, while TOPIX EPS is currently JPY93.2 as of July 17th.
TOPIX of 1,662.94 as of July 17th seems fairly valued as the current P/Es are 14.7x and 15.4x based on the
IBES 18 month and 12 month forward EPS forecasts.
13
-20
0
20
40
60
80
100
120
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2003/12 2004/12 2005/12 2006/12 2007/12 2008/12 2009/12 2010/12 2011/12 2012/12 2013/12 2014/12 2015/12 2016/12
(TOPIX, point)TOPIX and Forward EPS Forecast
TOPIX (LHS)
IBES Consensus EPS (RHS)
(Source) Bloomberg, DataStream, SMAM
Consensus EstimateHistorical EPS
(EPS, JPY)
12M FWD EPS=107.7
18M FWD EPS=112.6
as of July 17th 2015
Upto January 2017
TOPIX EPS=93.2
Corporate earnings : SMAM forecasting upbeat earnings growth
For FY2016, the recurring profits are expected to continue to grow by +8.5% YoY for SMAM core research
universe (216 companies).
Provided the recurring profits for FY2007 are set at 100, the profits are expected to keep growing to 122 and
133 for FY2015 and FY2016 after renewing the record highs in FY2014.
14
47
60
72
84
94100
4247
75
63
72
98103
122
133
5
10
15
20
25
30
35
40
FY20
02
FY20
03
FY20
04
FY20
05
FY20
06
FY20
07
FY20
08
FY20
09
FY20
10
FY20
11
FY20
12
FY20
13
FY20
14
FY20
15
E
FY20
16
E
(JPY Tri l lion)
(Note) 2007=100(Source) SMAM
SMAM Core-Research Universe Recurning Profits, 2007=100
Total (exc. Financials)
Manufacturers
Non-Manufactureres (Financials)
Supply-Demand balance ①: Public pensions raising Japanese stocks
Three large pensions such as Central Government Employees Retirement Fund (KKR), Local Government
Employees Retirement Funds and Private School Employees Retirement Funds are raising Japanese equities,
following the largest pension of GPIF.
All four pensions are estimated to buy another JPY5.3 trillion if they increase Japanese equities to 25% weight
in the portfolios.
15
Total Japanese BondsJapanese
EquitiesForeign Bonds Foreign Equities Others
GPIF 100.0% 38.4% 23.0% 12.5% 21.1% 5.0%
Centra l Government Employees Reti rement Fund (KKR) 100.0% 72.2% 10.3% 1.4% 1.4% 6.0%
Local Government Employees Reti rement Funds 100.0% 49.7% 22.5% 11.3% 11.3% 1.3%
Private School Employees Reti rement Funds 100.0% 52.8% 12.5% 12.2% 12.2% 9.7%
Average 100.0% 41.6% 22.1% 11.9% 11.9% 4.7%
*Target a l location weight (estimated) 100.0% 35.0% 25.0% 15.0% 25.0% 0.0%(Source) GPIF, Central Government Employees Retirement Fund (KKR), Local Government Employees Retirement FundsPrivate and School Emploees Retirement Funds and Nomura estimated(Note) The above estimates are subject to updates thereafter without notice.
Asset Al location
al location weight/tota l portfol io (%) as of June 2015
0%
10%
20%
30%
40%
50%
60%
70%
80%
Japanese Bonds Japanese Equities Foreign Bonds Foreign Equities Others
GPIF
Central Government Employees Retirement Fund (KKR)
Local Government Employees Retirement Funds
Private School Employees Retirement Funds
25%
Supply-Demand balance②: Domestic investors raised positions on weakness
Overseas investors temporarily liquidated Nikkei futures positions for the 1st and 2nd week of July when Nikkei
Index dropped to below 20,000 on a plunge in Chinese stocks. The net sale for futures increased to JPY1,186
billion, whereas that for cash positions remained relatively stable at JPY682 billion in net sale.
Meantime, domestic investors raised Japanese stocks on weakness in market. Mutual funds and retail investors
bought JPY854 billion and JPY796 billion respectively during the same period.
16
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
7,000
9,000
11,000
13,000
15,000
17,000
19,000
21,000
23,000
04/12 05/06 05/12 06/06 06/12 07/06 07/12 08/06 08/12 09/06 09/12 10/06 10/12 11/06 11/12 12/06 12/12 13/06 13/12 14/06 14/12 15/06
Foreign Investors Net Purchase of Cash Equities (cumulative)
Nikkei 225 (LHS) Net Purchase of Cash Equities (RHS)
Upto July 10th 2015(Source) Tokyo Stock Exchange, SMAM
(Yen) (JPY bi l lion)
▲ 2,000
▲ 1,500
▲ 1,000
▲ 500
0
500
1,000
Overseas Financials Corporate Mutual Funds Retail
(Transaction value, JPY billion)
(Source) Tokyo Stock Exchange, SMAM
Transaction Value (futures/cash) by investor category
1st week July
1nd week July
17
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demonstrate capabilities and expertise of Sumitomo Mitsui Asset Management Company, Ltd. (hereinafter “SMAM”), or to provide information on
investment strategies and opportunities. Therefore this material is not intended to offer or solicit investments, provide investment advice or service, or to be considered as disclosure documents under the Financial Instruments and Exchange Law of Japan.
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