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Japanese Stock Market Outlook
SMAM monthly comments & views
~ December 2014 ~
Japanese Economy
Jul-Sep GDP came out at surprisingly weak headline number of -1.6% QoQ annualized. This was due to inventory cut back by industries. Private consumption started to show recovery, though still fragile, and delaying the next consumption tax hike for 18 months could stimulate consumer sentiment.
• After the unexpectedly weak Jul-Sep figures, SMAM reduced FY14 GDP growth forecast to -0.5% from previous
+0.1%. On the other hand, Forecast for FY15 was raised to 1.4% from previous 1.1% considering simulative
effects from postponing next consumption tax hike.
• Exports turned positive in Jul-Sep and it could help Japanese industries as further weakening of yen is
expected.
Japanese Stock Markets
Surprising move by both BOJ and Abe government inspired a fresh life into the Japanese stock market. Snap election in December will provide Abe led LDP-Komeito coalition with re-strengthened political standings. Size of the supplemental budget spending and wage increase prospect for 2015 spring negotiation round would attract investors’ attention for the short term.
• SMAM’s forecast range for TOPIX is from 1300 to 1460 until December and from 1260 to 1520 for Jan-Mar
2015. Potential further upward earnings revisions on the back of weaker yen and GPIF’s allocation shift to
equities will be supportive for the stock market.
• Risks could be such as slowdown in US economy, heightening geopolitical tensions and Abe led coalition to
face heavy loss in the election.
Executive summary
1
Outlook for the Japanese Economy
2
SMAM economic outlook for FY14-15
3
After unexpectedly weak Jul-Sep figures, SMAM reduced FY14 GDP growth forecast to -0.5% from previous
+0.1%. On the other hand, Forecast for FY15 was raised to 1.4% from previous 1.1% considering simulative
effects from postponing next consumption tax hike.
Jul-Sep GDP was dragged down by inventory cut back by industries. Private consumption started to show
recovery, though still fragile, and delaying the next consumption tax hike for 18 months could stimulate consumer
sentiment.
Exports turned positive in Jul-Sep, which could help Japanese industries as further weakening of yen is expected.
Notes: P=Official preliminary report, E=SMAM forecasts. SMAM views are as at 17 November 2014 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)
Real GDP 0.3% 0.7% 2.2% -0.5% 1.4%
Private Consumption 1.4% 1.5% 2.5% -2.9% 1.4%
Housing Construction 3.2% 5.4% 9.5% -10.1% 1.9%
Private Capital Investment 4.8% 0.7% 2.6% 1.3% 2.4%
Public Consumption 1.2% 1.5% 1.8% 0.5% 0.8%
Public Investment -3.2% 1.3% 15.0% 4.4% -1.0%
Net Exports (contrib. to growth) -1.0% -0.8% -0.5% 0.6% 0.1%
Exports -1.6% -1.3% 4.8% 6.1% 3.8%
Imports 5.3% 3.6% 7.0% 2.3% 3.6%
Nominal GDP -1.4% -0.2% 1.9% 1.3% 2.4%
GDP Deflator -1.7% -0.9% -0.4% 1.8% 1.1%
FY14E FY15EFY11 FY12 FY13
Quarterly GDP : Inventory cut back by industries dragged Jul-Sep GDP into negative territory
Jul-Sep GDP came out at surprisingly weak headline number of -1.6% (QoQ annualized and the same applies
to the following numbers).
This was due to inventory cut back by industries, which made contribution of -2.6% .
Contribution of private consumption was up by 0.9% and expected to continue mild recovery going forward.
4
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
12 13 14 15 16
Net exports
Public investment
Private housing investment
Others
Private consumption
Private Capital Investment
GDP
(QoQ % annualized) Real GDP and contribution by components
(Source) Cabinet Office
Forecast by SMAM
"Others" consist of mostly Inventory change.
Inventory rose to a historically high level and had a sharp cut back recently
Monthly statistics show that inventory reached a historically high level in August, which seems to have triggered
a sharp cut back in September.
The progress in inventory adjustments is favorable for industries as increase in production becomes more likely
when recovery in demand takes place.
5
80
90
100
110
120
130
140
150
160
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 7 9 11 1 3 5 7 9 11 1 3 5 7 9
04 05 06 07 08 09 10 11 12 13 14
Inventory level
Inventory/Shipment ratio
Inventory and Inventory/Shipment ratio for all industries(Indexed 100 = 2010 average)
(Source) Ministry of Economy, Trade and Industry
6
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
1 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 9
08 09 10 11 12 13 14
Machinery orders
Manufacturer Non-manufacturer Total
Note: Seasonally adjusted. Bar charts are % point contribution to %MoM. Calender yearSource: Ministry of Economy, Trade and Industry, SMAM
(MoM %)
In the GDP statistics, private capital investment has stalled recording -2.8% and -0.1% for Apr-Jun and Jul-Sep
respectively after the sharp increase in Jan-Mar at 4.2 % ( all figures are QoQ annualized contribution).
However, machinery orders have been showing more stable increase in recent months, which could lead to the
recovery in the capital spending in the near future.
Machinery orders seem stabilized after volatile 1H
7
As a silver lining for the Japanese economy, export volume started to increase in Jul-Sep quarter and
accelerated in October helped by US, China and other Asian countries as destinations. Yen is forecast to get
even weaker and increase in exports could be a supporting factor for the Japanese economy.
Increase in exports could offer a helping hand to the Japanese economy
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
10 11 12 13 14
Others
EU
China
Asia excl. China
US
Total exports
Total export volume (QoQ % change) and contribution by regions(QoQ %)
(Source) Ministry of Finance, compiled by SMAM
4Q
Figure for 4Q 2014 is for October only.
CPI is expected to slow down on the back of diminishing contribution from energy
BOJ surprised the global financial markets by announcing another massive monetary easing in October.
SMAM’s current forecast for CPI is still below BOJ’s target of 2% and BOJ’s nerve might face another test
going forward despite the recent additional easing.
8
-1.80%
-1.60%
-1.40%
-1.20%
-1.00%
-0.80%
-0.60%
-0.40%
-0.20%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
1.80%
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 1011121 2 3 4 5 6 7 8 9 1011121 2 3 4 5 6 7 8 9 1011121 2 3
11 12 13 14 15 16
Components of Core CPI (excl. fresh food) and forecast(YOY %)
(Source) Ministry of Internal Affairs & Communications, forecast by SMAM.
SMAM Forecast
FY2011 0.0%
FY2012 ▲0.2%
FY2013 +0.8%
FY2014 +1.0%
Note: Excluding direct impact from consumption tax hike in April.
FY2015 +1.0%
Energy
Food
Core CPI (excl. fresh food)
Real wage increase in the next year came into sight after delaying the next tax hike
Regular wage payment increased by 0.5% in September, for four consecutive months since June.
Due to higher inflation, contracting real wage has proved too burdensome for the consumers so far.
Postponing the next round of consumption tax hike paved the way for the increase in real wage in the next year,
which is vital for the Japanese economy to decisively escape from the long standing deflation.
9
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
1 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8
10 11 12 13 14
Bonus
Overtime etc.
Regular wage payment
Wage increase
Wage increase and contribution of each component
(Source) Ministry of Health, Labor and Welfare
(YoY %)
9-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
05 06 07 08 09 10 11 12 13 14 15
Real wage Number of employees Real Employee Compensation
Real Employee Compensation and its breakdown(YoY %)
Source: Cabinet Office, Ministry of Internal Affairs and Communications, Ministry of Health, Labour and Welfare . Forecasts by SMAM
SMAM Forecasts
Outlook for the Japanese Stock Markets
10
Stock market outlook: Stimulative policy mix would work positively for the stock market
SMAM short-term view Surprising move by both BOJ and Abe government inspired the fresh life into the Japanese stock market. Snap
election in December will provide Abe led LDP-Komeito coalition with re-strengthened political standings. Size of the supplemental budget spending and wage increase prospect for 2015 spring negotiation round would attract investors’ attention for the short term.
SMAM’s forecast range for TOPIX is from 1300 to 1460 until December and from 1260 to 1520 for Jan-Mar 2015. Potential further upward earnings revisions on the back of weaker yen and GPIF’s allocation shift to equities will be supportive for the stock market.
Risks could be such as slowdown in US economy, heightening geopolitical tensions and Abe led coalition to face heavy loss in the election.
Longer-term outlook (6-month and beyond) For longer-term, we continue to expect the market to track on a modest uptrend, supported by US-led
moderate global growth, solid corporate earnings growth and Japan’s admittedly slow but steady reforms.
Note: SMAM forecasts are as at 19 November 2014 and subject to updates without notice
11
700
800
900
1,000
1,100
1,200
1,300
1,400
1,500
1,600
1,700
Jul-1
2
Aug-1
2
Sep-1
2
Oct-
12
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
TOPIX
Forecast upper range
Forecast lower range
SMAM forecast range for TOPIX index
(Source) Tokyo stock exchange, forecast by SMAM
(Points)
Base scenario & Upside / Downside risks for our forecasts
Our Base Scenario is assuming the following views:
• LDP Komeito coalition parties sustain large majority after the snap election in December
• Global economic growth is going to be sustained led by strong US economy
• Japan’s recovery from tax-hit weak demand
• Political supports including reasonably effective growth strategies
• Growing expectations for positive earnings revisions by corporates
Upside Risks include:
• Weaker JPY than a base assumption (USD=JPY118 at CY14 end)
• Stronger global growth
• More powerful measures by Japanese authorities
Downside Risks include:
• Markets to turn around to deeper risk-off mode, should geopolitical tensions grow
• US economy to slowdown
• LDP Komeito coalition parties face heavy loss of lower house seats at the snap election
• Unsatisfactory earnings revisions by companies
12
Snap election is expected to reestablish political standings of PM Abe
After resignation of two newly appointed cabinet ministers on money scandals, approval rating of PM Abe and
his cabinet declined to 44% in November, dangerously close to the historically crucial 40% level.
LDP has approval ratings of 36.6%, still far ahead of the leading opposition party DPJ at 7.9%, whereas 40%
support no party. LDP and Komeito coalition is likely to keep large majority and reestablish its political standings
through the snap election even if losing dozens of seats.
13
44
0
10
20
30
40
50
60
70
80
90
Ap
r-0
0M
ori
Ma
y-0
1K
oiz
um
i
Oct-
06
Ab
e 1
st
Oct-
07
Fu
ku
da
Oct-
08
Aso
Oct-
09
Ha
toya
ma
Ju
n-1
0K
an
Se
p-1
1N
od
a
Ja
n-1
3A
be 2
nd
No
v-1
4
Approval rating of Prime Ministers and Cabinets
(%)
(Source) NHK
Earnings forecasts entered a short lull period after the interim announcements
After the consecutive upward revisions, it entered a lull hovering around the neutral level after most companies
announced interim results.
Japanese yen is getting weaker than the presumption rates on which analysts base their earnings forecasts and
further upward revision can be expected going forward.
14
-40%
-30%
-20%
-10%
+0%
+10%
+20%
+30%
2010 2011 2012 2013 2014
Topix Revision Index
Notes: Revision index= % of Analyst upgrades out of total Topix firms - % of downgrades. Calender year, weeklySource: IBES, SMAM
Up to Nov 14
Japanese stock market looks fairly valued
As of Nov 17 2014, IBES 12 month forward EPS forecast for TOPIX was 96.45. PER range after Abenomics
has been mostly between 13x to 15x, which equals to 1253 and 1446 points for TOPIX index respectively based
on this EPS.
Current Japanese yen level is much weaker than the presumption rate for analysts forecasts and further upward
revision can be expected. SMAM’s current upside of the forecast range for TOPIX until March 2015 is 1520,
which assumes 5% upward EPS revision to 101.27 and 15x PER.
15
300
500
700
900
1,100
1,300
1,500
1,700
1,900
Jan
-07
Mar-
07
May-0
7
Jul-0
7
Se
p-0
7
Nov-0
7
Jan
-08
Mar-
08
May-0
8
Jul-0
8
Se
p-0
8
Nov-0
8
Jan
-09
Mar-
09
May-0
9
Jul-0
9
Se
p-0
9
Nov-0
9
Jan
-10
Mar-
10
May-1
0
Jul-1
0
Se
p-1
0
Nov-1
0
Jan
-11
Mar-
11
May-1
1
Jul-1
1
Se
p-1
1
Nov-1
1
Jan
-12
Mar-
12
May-1
2
Jul-1
2
Se
p-1
2
Nov-1
2
Jan
-13
Mar-
13
May-1
3
Jul-1
3
Se
p-1
3
Nov-1
3
Jan
-14
Mar-
14
May-1
4
Jul-1
4
Se
p-1
4
Nov-1
4
TOPIX vs. Implied levels by PER based on 12-month Forward EPS
TOPIX
PER x16
PER x15
PER x14
PER x13
PER x12
PER x11
Notes: Calender year, week-end Topix, PER base on 12-month forward EPSSource: Tokyo Stock Exchange, IBES 12 month forward EPS, SMAM
(pts)
Up to Nov 17th 2014
16
Forecasts for shareholder returns are revised further upward
SMAM monitors forecasts for shareholder returns every month, which has been showing upward revisions.
Dividends for FY2014 and 2015 were revised upward by 0.2 and 0.3 trillion yen respectively in November from
the previous month.
Social environments are rapidly changing and companies are under pressure for making better management
from shareholder views, which will improve the efficiency of the companies and should be beneficial for
corporate value in the long term. Increasing number of companies are setting ROE targets these days.
16
7.6
6.9
8.2
8.8 9.4
4.3
1.7
1.9
2.8
3.5
36.932.6
37.2 37.8
0
20
40
60
80
100
0
1
2
3
4
5
6
7
8
9
10
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
(JPY tn) Dividend payments & Share buyback by listed firms
Aggregate Dividends (LHS)
Share Buyback Total (LHS)
Div. Payout Ratio* (RHS)
Total Shareholders Return(RHS)
Forecast
FY
(%)
Notes: For ordinary shares of listed firms excluding lossmakers or subsidiariesSource: Toyo Keizai, Quick, I-N Information Systems, Daiwa Securities forecasts
Any material slowdown in global economy could be a risk for the stock market
Observing the monthly movements in the charts below, Japanese stock market might be extended a little
compared to the declining global PMI, which is sustained solely by US.
US PMI has stayed at high level and could be due for a cyclical slowdown in the short term. Pick up in other
countries and regions are much awaited.
17
650
750
850
950
1,050
1,150
1,250
1,350
1,450
44
46
48
50
52
54
56
58
11/12 12/06 12/12 13/06 13/12 14/06
TO
PIX
GLO
BA
L P
MI
GLOBAL PMI & TOPIX
Global PMI TOPIX
(Source) Datastream, Tokyo stock exchange
40
42
44
46
48
50
52
54
56
58
60
11/12 12/06 12/12 13/06 13/12 14/06
PMI of major countries and regions
GLOBAL USA JAPAN EURO CHINA
(Source) Datastream Up to Oct. 2014 Up to Oct. 2014
18
Future selling by overseas investors was swiftly rewound to open a new rally
18
Future selling by overseas investors, which we pointed as a factor behind the correction in the stock market
last month, was swiftly rewound to ignite recent rally in the Japanese stock market.
(40,000)
(30,000)
(20,000)
(10,000)
0
10,000
20,000
30,000
40,000
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
Overseas investors' future positions & Nikkei 225
Nikkei 225 index (LHS)
Overseas Investors cumulative futurepositions (RHS)
up tp Oct 7
YenYen 000' mil
(Source) Tokyo Stock Exchange
19
Disclaimer
Please read this disclaimer carefully. = This material is for non-Japanese institutional investors only. = The research and analysis included in this report, and those opinions or judgments as outcomes thereof, are intended to introduce or
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.
= The expected returns or risks in this report are calculated based upon historical data and/or estimated upon the economic outlook at
present, and should be construed no warrant of future returns and risks. = Past performance is not necessarily indicative of future results. = The simulated data or returns in this report besides the fund historical returns do not include/reflect any investment management fees,
transaction costs, or re-balancing costs, etc. = The investment products or strategies do not guarantee future results nor guarantee the principal of investments. The investments
may suffer losses and the results of investments, including such losses, belong to the client. = The recipient of this report must make its own independent decisions regarding investments. = The opinions, outlooks and estimates in this report do not guarantee future trends or results. They constitute SMAM’s judgment as of
the date of this material and are subject to change without notice. = The awards included in this report are based on past achievements and do not guarantee future results. = The intellectual property and all rights of the benchmarks/indexes belong to the publisher and the authorized entities/individuals. = This material has been prepared by obtaining data from sources which are believed to be reliable but SMAM can not and does not
guarantee its completeness or accuracy. = All rights, titles and interests in this material and any content contained herein are the exclusive properties of SMAM, except as
otherwise stated. It is strictly prohibited from using this material for investments, reproducing/copying this material without SMAM’s
authorization, or from disclosing this material to a third party.
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As of November 2014