Japanese Stock Market Outlook SMAM monthly comments & views - February 2017 -
Executive summary Japanese Economy SMAM s GDP growth forecast was unchanged from the last month. Japanese economy historically has a high sensitivity to global economic growth, which is recently gathering steam. Export volume has been in an upward trend since the middle of 2015 and industrial production since mid 2016, however, recent hard comments on US- Japan car trade from US president Trump brought some clouds over exports from Japan. Fiscal plan of Trump Whitehouse is going to be revealed in February. SMAM forecasts US$/yen range between 112 and 122 for 2017 with a risk for the downside to 105 if US moves to cap and reverse the dollar strength considering its negative effects on US industries. Europe is going to face important events such as notification of Brexit, elections in France, Germany and other countries. Japanese Stock Markets Japanese stock market is anxiously waiting for the actual Trump policies to be confirmed. Current PER around 15x seems a little stretched and the stock market would require some consolidation period waiting for the estimated earnings growth to be actually achieved. Nevertheless strong earnings growth expected in Jan-Mar quarter in Japan and higher US stock prices could lift Japanese stock markets. Japanese equities will be supported by improving fundamentals in the long-term. Double digit earnings growth is expected for FY2017. Further fiscal stimulus can be expected in Japan meanwhile BOJ would keep its extra-easy monetary policy. Risks are how protectionist Trump s trade policy could become and possible heightening in geo-political tensions in East Asia due to more confrontational US-China relations. After falling for 2 consecutive years in FY2014 and 15, ROE is forecast to recover to 9.2% in FY2016 and to reach 10% mark in FY2017. ( for SMAM 221 companies excluding financials) Notes: Macro and market views are as of Jan.18 th and 20 th, 2017 respectively, and subject to updates thereafter without notice 1
Outlook for Japanese Economy 2
Where America First policies would lead the world? In less than a week after the inauguration as US president, Trump Whitehouse has put forward key policy issues. President Trump has signed various Executive Orders such as exiting TPP, allowing Canada-Texas oil pipeline, and stopping Obama care, and also made hard comments against international trade partners of US. Trump policies started to take shape, however, it is still uncertain how strong the protectionism could become and how much stimulative fiscal policies could be negotiated with the congress. <Six top issues> America First Energy Plan: Embrace the shale oil and gas revolution to bring jobs and prosperity to millions of Americans. Green light was given to Canada-Texas oil pipeline project turning over the rejection made by former president Barak Obama. America First Foreign Policy: Committed to a foreign policy focused on American interests and American national security. Bringing Back Jobs And Growth: Create 25 million new American jobs in the next decade and return to 4 percent annual economic growth. Practical tax reduction and fiscal spending plan still need to be negotiated with republican led congress. Making Our Military Strong Again: End the defense sequester and submit a new budget to Congress outlining a plan to rebuild our military. Standing Up For Our Law Enforcement Community: Fight for the safety of every American. Building a border wall to stop illegal immigration. Trade Deals Working For All Americans: Tough and fair trade agreements. Signed to exit TPP. Announced re-negotiating NAFTA. Hard comments on US-Japan car trades. Hard comments against China. (Source) US Whitehouse and various publications, compiled by SMAM 3
Political events should gather attention in 2017 Fiscal plan of Trump Whitehouse is going to be revealed in February. Europe is going to face important events such as notification of Brexit, elections in France, Germany and other countries. Schedule of key events in 2017 Month Region/Country Events Notes Japan First estimate of 4Q 2016 GDP February March April Netherlands Apr or May France June US Japan State of the Union Address The Budget Message of The President Convention of the Liberal Democratic Party Spring wage negotiations Budget for FY2017 to be approved Action plan for changing working practice General election Fiscal plan of the Trump whitehouse is going to be revealed. Extend maximum party leadership from 2 terms running? UK Notification of exiting EU? Supreme Court ruling require the government to gain approval of the Parliament. Japan Japan Japan BOJ Tankan business report BOJ perspective report Presidential election Ordinary Session of National Diet ends France Lower house election July Global G20 meeting August Germany General election (Source) Various publications, assembled by SMAM Election for the Tokyo Metropolitan Assembly 4
SMAM economic outlook for FY16-18 SMAM s GDP growth forecast was unchanged from the last month. CPI is forecast to move up to 0.7% both for FY2017 and 2018. ( YoY %) FY13 FY14 FY15 FY16E FY17E FY18E Real GDP growth 2.6% -0.4% 1.3% 1.2% 1.1% 0.9% Private Consumption Expenditure 2.7% -2.7% 0.5% 0.7% 0.6% 0.6% Private Housing Investment 8.3% -9.9% 2.7% 5.7% -0.0% 1.0% Private Capital Investment 7.0% 2.5% 0.6% 1.4% 1.5% 2.1% Public Consumption Expenditure 1.7% 0.4% 2.0% 0.7% 1.1% 0.9% Public Capital Investment 8.6% -2.1% -2.0% 0.1% 5.7% 0.2% Net Exports (contrib. to GDP growth) -0.5% 0.6% 0.2% 0.4% 0.2% 0.1% Exports 4.4% 8.7% 0.8% 1.1% 2.4% 1.7% Imports 7.1% 4.1% -0.2% -1.5% 1.2% 1.0% Nominal GDP 2.6% 2.1% 2.8% 1.3% 1.6% 1.6% GDP Deflator 0.0% 2.5% 1.4% 0.0% 0.6% 0.7% Industrial Production 3.0% -0.4% -1.4% 1.2% 3.5% 2.5% CPI (excl. fresh food) 0.8% 0.9% -0.0% -0.3% 0.7% 0.7% Notes: E=SMAM forecasts. SMAM views are as of Jan 18 th, 2017 and subject to updates thereafter without notice (%, YoY except Net Exports) (Source) Cabinet Office, Bank of Japan, Ministry of Economy, Trade and Industry, Ministry of Internal Affairs and Communications, SMAM forecasts 5
Recovery in global economy has supported exports from and industrial production in Japan Japanese economy historically has a high sensitivity to global economic growth, which is recently gathering steam. Export volume has been in an upward trend since the middle of 2015 and industrial production since mid 2016. Recent hard comments on US-Japan car trade from US president Trump brought some clouds over exports from Japan. (yen billion) 6200 Export volume from Japan Indexed (2010=100) 140 Industrial Production (seasonally adjusted) Estimated index 6000 5800 130 General Machinery 5600 5400 5200 5000 120 110 100 Electronic components & devices Total Auto 4800 90 Note: Blue lines are for monthly and red lines are for quartrerly data. Data is monthly from Jan 2010 to Nov 2016. (Source) Ministry of Finance, Bank of Japan (Year) 80 (Year) Note: Data is monthly from Jan 2013 to Jan 2017 where Dec 2016 & Jan 2017 data is estimated index as of Nov 2016. (Source) Ministry of Economy, Trade and Industry 6
Japanese consumption is mildly recovering partly helped by expansion of female workers Japanese private consumption is mildly recovering. In this backgrounds are probably mildly increasing number of employees lead by expanding female workers. (%) 4.0 3.0 Nominal wage payment YoY % change Contribution of employee number Contribution of wage (%) 73.0 72.5 72.0 Male (left) Labour participation ratio Female (right) (%) 51.0 50.5 50.0 2.0 Total wage 71.5 49.5 1.0 71.0 49.0 0.0 70.5 48.5-1.0 70.0 48.0-2.0 69.5 47.5-3.0 (Year) 69.0 (Year) 47.0 Note:Data is monthly Mar.2012 to Nov 2016 (Source) Ministrry of Health, Labour & Welfare Note: Data is monthly from Jan 2010 to Nov 2016. Seasonally adjusted. (Source) Ministry of Internal Affair & Communications, compiled by SMAM 7
Expected stimulative Trump policies in US should make US$ fundamentally strong Rally in US$ halted responding to protectionist sounding comments from US president Trump. US government may not be in favor of strong US$, however, expected stimulative policies would make US$ strong. (%) Government Bond Yield Spread (10Y-2Y) (yen) US$/yen rate and US-JP 2Y government bond yield gap (%) 3 2.5 2 1.5 US Germany Japan 140 130 120 110 100 US$/Yen (left) 2Y US-JP (right) 5 4.5 4 3.5 3 2.5 2 1 0.5 90 80 1.5 1 0.5 0 70 0 (Month/Year) Note: Weekly data from Jan. 10th, 2014 to Dec. 30th, 2016 (Source) Datastream (Month/Year) Note: Weekly data from Jan. 12th, 2001 to Dec. 30th, 2016 (Source) Datastream 8
Outlook for Japanese Stock Markets 9
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Stock market outlook: Waiting for the real Trump policies to take shape SMAM short-term view Japanese stock market is anxiously waiting for the actual Trump policies to be confirmed. Current PER around 15x seems a little stretched and the stock market would require some consolidation period waiting for the estimated earnings growth to be actually achieved. Nevertheless strong earnings growth expected in Jan-Mar quarter in Japan and higher US stock prices could lift Japanese stock markets. Longer-term outlook (6-months and beyond) Japanese equities will be supported by improving fundamentals in the long-term. Double digit earnings growth is expected for FY2017. Further fiscal stimulus can be expected in Japan meanwhile BOJ would keep its extraeasy monetary policy. Risks are how protectionist Trump s trade policy could become and possible heightening in geo-political tensions in East Asia due to more confrontational US-China relations. (Points) 1,900 TOPIX index forecast range by SMAM 1,700 1,500 1,300 1,100 TOPIX 900 Forecast range upside Forecast range downside 700 (Source) TOPIX: Tokyo stock exchange, Forecast by SMAM (Month/Year) Note: SMAM s projection is as of Jan. 18 th,, 2017 and subject to updates without notice 10
Base scenario & Upside / Downside risks for our forecasts Our Base Scenario is assuming the following views: Practical Trump trade policies are made and serious trade disputes can be avoided. Expansionary policies in US keep global economies keep on a growth path. Japan s private consumption to grow mildly supported by wage growth. Japanese yen does not get extremely stronger beyond 100 yen against US$. Further fiscal stimulus will be made and extra easy monetary policy should sustain economic growth in Japan. Upside Risks include: Stronger-than-expected global growth. Stronger-than-expected measures by the Abe government. Downside Risks include: Confrontational foreign policies taken by Trump presidency shake global trades and deepen geo-political tensions. Populism gains in Europe further unstabilizing EU. Unexpectedly large impact from the process of US monetary policy normalization. Concern over emerging economies including China. SMAM s forecasts as of January 2017. 11
Rally in global stock markets continued before the inauguration of US president Trump Emerging market stabilized in December and made recovery in January. Global stock markets continued to rally running up to the inauguration of 45th US president Donald Trump. US$ based performance of stock markets (Dec 2015 =100) 120 MSCI 115 EM/US$ 110 S&P500 105 100 95 TOPIX/US$ 90 85 MSCI 80 Europe/US$ 75 70 TOPIX/Yen Notes: Month-end data from Dec 2015 to Jan 2017. Jan. 2017 data is as of 20th. (Source) Datastream, MSCI and Tokyo Stock Exchange, compiled by SMAM. (Month/Year) 12
Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 PER (Price Earnings Ratio) is hovering around 15 times level 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 January 13th, PER for TOPIX was 14.73x based on 12M forward. Stock market is expected to consolidate for a while waiting for the EPS to catch up to justify further upward move. TOPIX 1,900 1,700 1,500 1,300 TOPIX and PER based on 12-month forward EPS PM Abe's 2nd term started 16x 15x 14x 13x 12x 1,100 900 700 500 300 Note: Data is weekly from Oct. 26th 2007 to Jan. 13th 2017. TOPIX was 1544.89 at the end of the period. (Source) Tokyo Stock Exchange, Datastream and IBES, compiled by SMAM (Month/Year) 13
EPS forecasts by analysts continue to expand 12M forward EPS forecast provided by IBES shows continuing expansion, which lately forecasts 11.9% growth. (Points) 120 100 80 60 40 20 IBES EPS consensus forecast for TOPIX 70% 105 60% 94 50% 40% 30% 20% 11.9% 10% Historical EPS (left) 12M Forward EPS forecast (left) 12M forward forecast growth (right) 0 0% Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Note: Weekly data from Jan. 4th 2011 to Jan. 17th 2017. (Month/Year) (Source) Datastream, IBES 14
2002/A 2003/A 2004/A 2005/A 2006/A 2007/A 2008/A 2009/A 2010/A 2011/A 2012/A 2013/A 2014/A 2015/A 2016/E 2017/E 2001A 2002A 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016E 2017E ROE is on a recovering path to 10% mark expected in 2017 SMAM forecasts consecutive years of profit growth since FY2013 can be maintained for FY2016 and 17. For FY 2016, profit of Non-manufacturing sector is forecast to grow by 9.3% to offset the decline in Manufacturing sector of -4.1%. After falling for 2 consecutive years in FY2014 and 15, ROE is forecast to recover to 9.2% in FY2016 and to reach 10% mark in FY2017. (Note: *Numbers are for 221 companies in SMAM research coverage excluding financials.) (yen bil.) SMAM 221 companies recurring profits (excl. financials) SMAM 221 companies ROE (excl. financials) 35,000 30,000 25,000 27,547 Total industries Manufacturing Non-manufacturing 29,357 33,107 29,073 12% 10% 8% 10.9% Forecast 9.5% 9.2% 8.9% 8.2% 10.0% 20,000 17,996 20,105 6% 6.8% 6.2% 15,000 10,000 5,000 17,251 12,107 13,002 11,077 4% 2% 1.7% 4.5% 5.0% 0 0% (Source) announcement by companies, forecast by SMAM. (Fiscal year) Note: Data label is for the all industries. (Source) announcement by companies, forecast by SMAM. (Fiscal year) 15
Foreign investors purchasing continues to lift stock prices Foreign investors continue purchasing Japanese stocks. Japanese individual investors were selling Japanese stocks as stock prices recovered. Bar charts (Yen billion) 3,000 Net purchasing of Japanese equities by investor type TOPIX (points) 1700 2,000 1500 1,000 1300 0 1100-1,000 900-2,000 700-3,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun July Aug Sep Oct Nov Dec Jan 2015 Foreign Trust bank Individual Inv. Trust Fund Business corp TOPIX 2016 Note: Data is for Tokyo stock exchange and Nagoya stock exchange up to Jan.13th 2017. (Source) Japan Exchange Group (month/ year) 2017 (Month/Year) 500 16
Overheat in Japanese stock market calmed down to a normal level Gainers/Losers ratio is regarded as an indicator for the temperature of stock markets. Over 120% typically shows the market is overheated. The ratio went up above 160% on 15 th December 2016 first time since June 2014. Japanese stock market shifted to a consolidation mode afterwards and overheat calmed down to a normal level in mid January. 300 280 260 240 220 200 (%) 180 160 140 120 100 80 60 40 Gainers/Losers ratio(left axis) and TOPIX(right axis) Points 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Notes Gainers/Losers ratio = No. of stocks with rising share price / No. of stocks with falling share price (%) Source: Tokyo Stock Exchange, SMAM (Year/Month) Up to Jan. 18th 2017 17
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