Market Update Reliance Japan Equity Fund (An Open Ended Diversified Equity Scheme)

Transcription

1 Market Update Reliance Japan Equity Fund (An Open Ended Diversified Equity Scheme) Economy and Politics o Announcement season for FY2016 ending in March 2017 is nearly over. Nihon Keizai Shimbun (Nikkei) reported on the front page of its morning edition on May 13th that Japanese listed companies may be expected to post the record profits for two consecutive fiscal years in FY2017. o While there were a few negative factors including stronger Yen in FY2016, Japanese companies regained the confidence for their earning power, as the recovery in 2H enabled them to mark profit growth finally. According to the data aggregated by Nikkei, Japanese listed companies increased consolidated net profits for FY2016 (Apr-Mar) by +21% YoY. o Profit growth in FY2017 may be expected to be driven by electric appliance makers who regained global edge, as well as by trading conglomerates who are now supported by recovery in resource prices, while three major auto companies may expect profit declines due to severer competitions in the North America and decreasing effect from once-weaker Yen. Companies typically make earnings estimates based on conservative assumptions at first, which are in many cases revised up during the fiscal year unless there are major changes in the assumptions. As for FY2017, companies use an assumed exchange rate of 108 yen to USD on average, a bit firmer than current trading level of area. o That said, as far as USD/JPY FX rate is concerned, Japanese companies do not necessarily rely only on such conservativeness. They, at the same time, have become more resistant to strong Yen. Expected EPS of the Nikkei Stock Average constituent companies exceeded 1300 yen for the first time on May 10th at PER of 15.27, when the index closed at 19, and USD/JPY was at 114 area. On the other hand, expected EPS as of June 2015 was 1,250s at PER of 16.5, when the Nikkei was approaching 21,000 and USD/JPY was at 121 area. Based on our view that this is a proof of Japanese companies structural improvement to generate profits without excessive reliance on weak Yen, we may not think Japanese equities are overvalued even when the Nikkei exceeds 20,000. o Apart from their earning power, Japanese companies are at the same time promising from a perspective of development in corporate governance, we would think. o The topic of corporate governance has been less focused these days, compared to 2014 and 2015 when it gathered attention both domestically and internationally under the initiatives of Shinzo Abe s cabinet including the implementation of Japan s Corporate Governance Code. Moreover, some referred to the subject with a tone that corporate governance reform had turned out unsuccessful. That said, from a perspective of investment professionals, we have a feeling that the core of the reform is not yet completed. o Indeed, there are lots of changes and developments observed these days. For instance, the number of companies that set and disclose their target on ROE and payout ratio increased significantly in recent few years, and so did the number of companies to elect independent outside director/s. Total amount of shareholder return including share buybacks and dividends keeps on renewing the record since Japanese companies were typically notorious for low

2 o o o ROE. However, it is said that more than half of listed companies in Japan may possibly achieve their near-term target of 8+% ROE as at 1H announcements. In addition, as the Japan s Stewardship Code will be revised this year, investors eyes towards resolution matters at a company meeting are getting severer, and companies are thinking about shareholder return more proactively. According to the statistics on trading volume of TSE 1st section by investor type, foreign investors bought Japanese equities more than they sold for 5 straight weeks since the 1st week of April. This may be a resurgence of their interest in Japanese equities. Solid business performance and higher attention to shareholder return. Given the Japanese companies high cash balance, these may be the important points to note when watching the Japanese equity market for FY2017 ending in March Markets Overview (Apr 2017) o The Japanese stock market rebounded in April. o The market continued to drop in the beginning of the month, as the yen appreciated to the 108JPY/USD level on heightening geopolitical risks related to Syria and North Korea, and a comment by US President Donald Trump that the dollar was too strong. The Nikkei 225 fell to the low 18,000 level, marking its yearly low. However, the index rebounded towards the end of the month, as investor confidence improved, following the outcome of the first round of the French presidential election, and the fact that North Korea refrained from a major provocation. o The Nikkei 225 closed the month at 19,196.74( / +1.5% MoM), and TOPIX at 1,531.80( / +1.3% MoM). Among the 33 TOPIX index industry groups, Other Products, Construction, Real Estate, Retail Trade, and Rubber Products rose, while Oil and Coal Products, Marine Transportation, Mining, Fishery, Agriculture & Forestry, and Securities and Commodities Futures fell. Source: Bloomberg, RMF Internal Research. Data as on Apr 30, Outlook for Equity and Currency Markets o We may expect the market to continue to move in a relatively small range in May. o Concerns over President Trump s policies may limit the upside while continued improvements in US economic indicators and ETF purchases by the BOJ(Bank of Japan) may support the downside. o Company forecasts for FY2017 are somewhat bearish, due to uncertainty over the political and economic situation globally. We may expect market participants to become more focused on companies with clear competitive advantages, which may grow earnings whatever the business environment. Source: Bloomberg, RMF Internal Research.

3 Note: Past performance may or may not be sustained in future. Data as on Apr 30, Source: Bloomberg Note: Past performance may or may not be sustained in future. Data as on Apr 30, Source: Bloomberg

4 Japan Markets & Macro Updates: Indices Performance 28-Apr 31-Mar Abs. Change % Change YTD % Chg NIKKEI % 0.43% TOPIX % 0.87% NIKKEI 225 Top 5 Gainers Company 28-Apr 31-Mar Abs. Change % Change FURUKAWA ELEC Nonfer.Mtls 4,510 4, % KANSAI ELEC PWR Elec.Pwr&Gas 1,507 1, % SKY PERFECT JSAT Inf.&Com % KYOWA KIRIN Pharm. 1,912 1, % MINEBEA MITSUMI Elec. App. 1,611 1, % NIKKEI 225 Top 5 Decliners Company 28-Apr 31-Mar Abs. Change % Change TOHO ZINC Nonfer.Mtls % PIONEER Elec. App % JXTG HOLDINGS Oil&Coal P % FUJI ELECTRIC Elec. App % YAHOO JAPAN Inf.&Com % Currency 28-Apr 31-Mar Abs. Change % Change YTD % Chg JPY/USD % -4.58% JPY/INR % 0.90% Debt Markets Company 28-Apr 31-Mar Abs. % Change YTD % Chg 10yr JGB 0.015% 0.065% -0.05% -0.03% 20yr JGB 0.555% 0.630% -0.08% -0.02% Economic Indicator QoQ (annualized) Current Quarter Ago 2 Qtrs Ago 3 Qtrs Ago GDP (real) (Oct-Dec 16) (Jul-Sep 16) (Apr-Jun 16) (Jan-Mar 16) 1.20% 1.20% 2.20% 1.90% YoY Current Month Ago 2 Mths Ago 3 Mths Ago (Mar-17) (Feb-17) (Jan-17) (Dec-16) Industrial Production (mom,%) -2.10% 3.20% -2.10% 0.70% Core Machinery Orders (mom,%) 1.50% -3.20% 2.10% Overall Unemployment Rate 2.80% 2.80% 3.00% 3.10% Core CPI (yoy,%) 0.20% 0.20% 0.10% -0.20% Note: The above mentioned data is only for illustration purpose. Past performance may or may not be sustained in future. Source: Bloomberg

5 Reliance Japan Equity Fund - Portfolio Details (Apr 2017) Portfolio as on April 30, 2017 Company/Issuer Advertising % of Assets Dentsu Inc* 3.26 Apparel Retail Fast Retailing Co Ltd 3.15 Auto Parts & Equipment Sumitomo Elec Indust 3.07 Automobile Manufacturers Toyota Motor Corp 3.00 Building Products Daikin Industries Ltd 3.05 Chemicals Toray Industries Inc 3.20 Construction & Farm Machinery & Heavy Trucks Kubota Corp 3.15 Diversified Banks Mitsubishi UFJ Fin 3.02 Diversified Chemicals Mitsubishi Chemical 3.13 Diversified Real Estate Activities Daiwa House Industry* 3.22 Mitsui Fudosan Co 3.18 Electrical Equipment Nidec Corporation 3.10 Electronic Equipment & Instruments Hitachi Ltd 3.06 Food Products MEIJI Holdings Co. Ltd.* 3.28 Food Retail Seven And I Holdings* 3.36 Gas Utilities Tokyo Gas Co Ltd* 3.25 Household Durables Sony Corp* 3.25 IT Consulting & Other Services NTT Data Corporation 3.13 Integrated Telecommunication Services NTT Corp 3.10

6 Leisure Equipment & Products Shimano Inc* 3.32 Namco Bandai Holdings Inc 3.18 Other Diversified Financial Services Orix Corporation 3.13 Personal Products Kao Corporation 3.19 Professional Services Temp Holdings Co Ltd* 3.22 Property & Casualty Insurance Msand Ad Ins Group H 2.99 Railroads East Japan Railway* 3.23 Soft Drinks Suntory Beverage And Food Ltd* 3.34 Tires & Rubber Bridgestone Corp 3.22 Tobacco Japan Tobacco Inc 3.05 Trading Companies & Distributors Itochu Corporation 3.00 Cash and Other Receivables 5.16 Grand Total * Top 10 Holdings Sector Allocation Leisure Equipment & Products 6.49% Diversified Real Estate Activities 6.41% Food Retail 3.36% Soft Drinks 3.34% Food Products 3.28% Advertising 3.26% Household Durables 3.25% Gas Utilities 3.25% Railroads 3.23% Professional Services 3.22% Tires & Rubber 3.22% Chemicals 3.20% Personal Products 3.19% Construction & Farm Machinery & Heavy Trucks 3.15% Apparel Retail 3.15% Diversified Chemicals 3.13% IT Consulting & Other Services 3.13%

7 Other Diversified Financial Services 3.13% Electrical Equipment 3.10% Integrated Telecommunication Services 3.10% Auto Parts & Equipment 3.07% Electronic Equipment & Instruments 3.06% Tobacco 3.05% Building Products 3.05% Diversified Banks 3.02% Automobile Manufacturers 3.00% Trading Companies & Distributors 3.00% Property & Casualty Insurance 2.99% Grand Total 94.84% Note: The sectors mentioned in the table are not a recommendation to buy/sell in the said sectors. The scheme is currently holding investments in the said sectors and may or may not have future position in the same. The stocks mentioned form a part of the portfolio of the scheme and may or may not form a part of the portfolio in future. Please read Scheme Information Document carefully for more details and risk factors. Data as on Apr 30, 2017.

8 Product Label: This product is suitable for investors who are seeking*: PRODUCT LABEL Long Term Capital Growth investment in equity and equity related securities of companies listed on recognized stock exchange of Japan *Investors should consult their financial advisors if in doubt about whether the product is suitable for them. Scheme Specific Risk Factors: Trading volumes and settlement periods may restrict liquidity in equity and debt investments. Investment in Debt is subject to price, credit, and interest rate risk. Further, scheme is investing in Japan equity markets. Risk related to currency movement i.e., JPY vis-à-vis INR, risk related to taxation laws of Japan & changes therein are also applicable. The NAV of the Scheme may be affected, inter alia, by changes in the market conditions, interest rates, trading volumes, settlement periods and transfer procedures. The NAV may also be subjected to risk associated with investment in derivatives, foreign securities or script lending as may be permissible by the Scheme Information Document. Disclaimers: The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. Certain factual and statistical information (historical as well as projected) pertaining to Industry and markets have been obtained from independent third-party sources, which are deemed to be reliable. It may be noted that since Reliance Nippon Life Asset Management Limited (formerly Reliance Capital Asset Management Limited) has not independently verified the accuracy or authenticity of such information or data, or for that matter the reasonableness of the assumptions upon which such data and information has been processed or arrived at; RNLAM does not in any manner assures the accuracy or authenticity of such data and information. Some of the statements & assertions contained in these materials may reflect RNLAM s views or opinions, which in turn may have been formed on the basis of such data or information. Before making any investments, the readers are advised to seek independent professional advice, verify the contents in order to arrive at an informed investment decision. None of the Sponsor, the Investment Manager, the Trustee, their respective directors, employees, affiliates or representatives shall be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.