Japanese Stock Market Outlook SMAM monthly comments & views - January 2015 -
Executive summary Japanese Economy SMAM forecasts the Japanese economy to bottom-out from the 1Q 2015 as private consumption should finally put the last tax hike shock behind. The wage negotiation round starts in the new year and to be finalized by the end of March, which is important for drumming up the consumer sentiment. Jul-Sep GDP was revised down from -1.6% to -1.9%. SMAM reduced FY14 GDP growth forecast by 0.1% to -0.6% and also FY15 forecast by 0.1% to +1.3%. Export volume is increasing led by IT goods and consumer goods, which provides support to the economy. CPI is facing a downward pressure from lower oil prices, which makes BOJ s fight against deflation a tough task. Japanese Stock Markets The governing coalition parties won the lower house election in December exceeding even most optimistic predictions. PM Abe successfully increased its political capital, which re-established himself for a long and stable tenure and he will strongly pursue reflationary policies toward the next consumption tax hike now scheduled in April 2017. Double digit earnings growth is forecasted for the two consecutive fiscal years, which should provide further upside for the Japanese stock market. Risks could be such as slowdown in US and Chinese economies, heightening geopolitical tensions. 1
Outlook for the Japanese Economy 2
SMAM economic outlook for FY14-15 SMAM forecasts the Japanese economy to bottom-out from the 1Q 2015 as private consumption should finally put the last tax hike shock behind. The wage negotiation round starts in the new year and to be finalized by the end of March, which is important for drumming up the sentiment. Jul-Sep GDP was revised down from -1.6% to -1.9%. SMAM reduced FY14 GDP growth forecast by 0.1% to - 0.6% and also FY15 forecast by 0.1% to +1.3%. CPI is facing a downward pressure from lower oil prices, which makes BOJ s fight against deflation a tough task. (%YoY except Net Exports) FY11 FY12 FY13 FY14E FY15E Real GDP 0.4% 1.0% 2.1% -0.6% 1.3% Private Consumption 1.4% 1.8% 2.5% -3.0% 1.3% Housing Construction 3.2% 5.7% 9.3% -10.9% 1.1% Private Capital Investment 4.8% 1.2% 4.0% 0.5% 2.6% Public Consumption 1.2% 1.5% 1.6% 0.5% 0.9% Public Investment -3.2% 1.0% 10.3% 3.6% -1.2% Net Exports (contrib. to growth) -1.0% -0.8% -0.5% 0.7% 0.2% Exports -1.6% -1.3% 4.7% 6.3% 4.0% Imports 5.4% 3.6% 6.7% 2.3% 3.5% Nominal GDP -1.3% 0.1% 1.8% 1.2% 1.8% GDP Deflator -1.7% -0.9% -0.3% 1.8% 0.5% Notes: P=Official preliminary report, E=SMAM forecasts. SMAM views are as at 17 December 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 3
Quarterly GDP : Jul-Sep GDP was further down-revised Jul-Sep GDP was revised down from -1.6% to -1.9%. Export volume is increasing led by IT goods and consumer goods, which provides support to the economy.. (QoQ % annualized) 15.0 10.0 5.0 Real GDP and contribution by components Forecast by SMAM "Others" consist of mostly Inventory change. 0.0-5.0-10.0-15.0-20.0 Net exports Public investment Private housing investment Others Private consumption Private Capital Investment GDP 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 12 13 14 15 16 (Source) Cabinet Office 4
Export is expanding led by IT and consumer goods Export of electronics parts is growing as well as consumer goods, meanwhile growth of Auto related goods is stagnant, which probably resulting from progressed production shift to overseas. (QoQ %) 10% 8% 6% 4% Total export volume (QoQ % change) and contribution by goods category IT goods Consumer goods Auto & auto parts Capital goods Intermidiate goods Total exports 2% 0% -2% -4% -6% -8% -10% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 10 11 12 13 14 (Source) Ministry of Finance, compiled by SMAM Figure for 4Q 2014 is the average of October and November 5
Stagnant domestic economy affects sentiment of small mid enterprises while large ones sustain Stagnant economy in Japan is affecting small-mid companies while large companies are holding relatively positive business sentiments, which is in line with the strong corporate earnings growth. Domestic economy is bottoming out and positive growth is expected for 2015 and beyond, which will lift the sentiment in the next year. 40 30 BOJ Tankan Business Survey, DI for current condition Data period from Mar 2000 to Dec 2014 Large enterprise (non-manufacturing) 20 10 0-10 Large enterprise (manufacturing) Mid-small enterprise (non-manufacturing) -20-30 -40 Mid-small enterprise (manufacturing) -50-60 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Note: DI for future conditions as of December were added for 1Q 2015. (Source) Bank of Japan 6
Falling oil price is pulling down CPI Falling oil price is putting downward pressure on CPI, for which SMAM expect to fall below 0.5% in the middle of 2015. BOJ will have uphill task to achieve its current CPI forecast of 1.7% for FY2015. (YOY %) Components of Core CPI (excl. fresh food) and forecast 1.8% 1.6% SMAM Forecast 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% -0.2% FY2014 +1.0% -0.4% -0.6% FY2015 +0.9% -0.8% FY2013 +0.8% -1.0% -1.2% FY2012 0.2% -1.4% -1.6% FY2011 0.0% -1.8% 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 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 Core CPI (excl. fresh food) Energy Food 11 12 13 14 15 16 Note: Excluding direct impact from consumption tax hike in April. (Source) Ministry of Internal Affairs & Communications, forecast by SMAM. 7
Consumer sentiment has been deteriorating, which is expected to rebound next year Consumer sentiment has been declining after the consumption tax hike in April. Wage negotiation round starts early next year and to be finalized by March. Whether robust corporate earnings should feed to sizable wage increase is important for the Japanese economy. 60 Data period fron Jan 2006 to Nov 2014 Street Watchers DI Future condition DI 50 40 30 20 10 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Notes: Diffusion indices of "Economy Watchers Survey". DI above 50 means condition is improving. Future condition DI as of Nov was added for Dec 2014, Jan, and Feb 2015.. Source: Cabinet Office 8
Outlook for the Japanese Stock Markets 9
Stock market outlook: Strengthened reflationary policy should support the stock market SMAM short-term view The governing coalition parties won the lower house election in December exceeding even most optimistic predictions. PM Abe successfully increased its political capital, which re-established himself for a long and stable tenure and he will strongly pursue reflationary policies toward the next consumption tax hike now scheduled in April 2017. Double digit earnings growth is forecasted for the two consecutive fiscal years, which should provide further upside for the Japanese stock market. Risks could be such as slowdown in US and Chinese economies, heightening geopolitical tensions. 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 strengthened reflationary policies in Japan. (Points) 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 900 800 700 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 Note: SMAM forecasts are as at 19 December 2014 and subject to updates without notice May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 (Source) Tokyo stock exchange, forecast by SMAM SMAM forecast range for TOPIX index Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 TOPIX Forecast range upside Forecast range downside 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 10
Base scenario & Upside / Downside risks for our forecasts Our Base Scenario is assuming the following views: PM Abe continues long and stable government 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=JPY120 at March 2015) 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 Unsatisfactory earnings revisions by companies 11
PM Abe successfully increased its political capital by the snap election The governing coalition parties together increased the seats to 326, which was beyond the most optimistic predictions, well exceeding 317 seats required for passing laws even after rejected by the Upper House. PM Abe successfully increased its political capital, which re-established himself for a long and stable tenure. Abe administration will strongly pursue reflationary policies toward the next consumption tax hike now scheduled in April 2017. After the election on 14th Dec. % of total seats Before the election % of total seats Total seats 475 100% 480 100% Two thirds of the total 317 67% 320 67% Governing Coalition 326 69% 324 68% Liberal Demcratic Party 291 61% 293 61% Komeito 35 7% 31 6% Deemocratic Party of Japan 73 15% 62 13% Japan Restration Party 41 9% 42 9% Communist Party 21 4% 8 2% Others including 1vacancy 14 3% 44 9% Opposition Parties 149 31% 156 33% Lower House after the election DPJ Comm. JRP Komeito Othets LDP (Source) Yomiuri news paper 12
Further weakening of Yen is helping corporate earnings growth SMAM upgraded recurring profit growth forecasts both for FY2014 and FY 2015 mainly due to the assumption change in Yen/US$ rate from 100 to 115. Two consecutive fiscal years of double digit earnings growth is forecasted. Sectors leading earnings growth are Auto, Consumer electric appliances and Electric power & Gas. Earnings Tabulations ( SMAM Core Research Universe excl. financials) (% change) FY 2012 (Actual) FY 2013 (Actual) Forecasts for FY 2014 Forecasts for FY 2015 Timing of the forecasts made - - as of Sep 2014 as of 10th Dec 2014 as of Sep 2014 as of 10th Dec 2014 Revenue 3.5% 13.5% 3.2% 3.7% 3.3% 3.5% Operating Profits 6.8% 35.1% 7.0% 8.1% 11.9% 16.4% Recurring Profits 9.9% 39.3% 7.1% 11.2% 12.6% 13.5% Net Earnings 28.0% 85.4% 7.5% 12.0% 14.7% 15.4% *Figures show bottom-up yoy annual grow th forecasts by SMAM equity analysts. *Assumptions for forecasts: *A Japanese Fiscal Year is from April to March the follow ing year. As of Sep 2014 As of Dec 2014 FX rate (Yen/US$) 100 115 FX rate (Yen/ ) 140 140 Crude Oil CIF (Japan) $105/barrel $80/barrel 13
Allocation change in public pension funds Asset allocation change for GPIF (Government Pension Investment Fund) was officially announced on 31 st Oct the same day as surprise easing by BOJ. GPIF is on the process of making this allocation shift, which transfer 20 trillion yen from domestic bonds to Japanese equity and foreign assets. The shift could be completed as early as in 2015. 60% 50% 49.6% A Shift to new Basic Portfolio -20trn Yen +8trn Yen +4trn Yen +10trn Yen 40% 35.0% 30% 25.0% 25.0% 20% 18.2% 15.0% 12.1% 17.4% 10% 0% Domestic Bonds Domestic Equities Foreign Bonds Foreign Stocks Short-term Investments 2.6% 0.0% Sep-2014 Asset Weighting Target Asset Weighting Source:GPIF SMAM 14
Japanese stock market looks fairly valued As of Dec 18 2014, IBES 12 month forward EPS forecast for TOPIX was 98.55. PER range after Abenomics has been mostly between 13x to 15x, which equals to 1281 and 1478 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 1550, which assumes 5% upward EPS revision to 103.48 and 15x PER. (pts) 1,900 1,700 1,500 1,300 1,100 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 900 700 500 300 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Up to Dec 18th 2014 Notes: Calender year, week-end Topix, PER base on 12-month forward EPS Source: Tokyo Stock Exchange, IBES 12 month forward EPS, SMAM 15
Japanese market went through a short term retreat from overheating The ratio of number of stocks rose vs. fell is commonly used for monitoring heat in the stock market. The ratio over 120% is regarded as overheated. The ratio was extremely high at the beginning of December, and then retreated toward the Lower House election on 14 th Dec. After further consolidation in the following week, the market made a rebound and could be ready for the next rally. (%) (pts) Tokyo Stock Exchange Gainers/Losers Ratio 170 1,600 160 150 140 130 120 110 100 90 80 70 overbought oversold 1,400 1,200 1,000 800 600 60 G/L ratio (LHS) 50 2012 2013 2014 Notes: Calender year. G/L ratio=# of gainer stocks/# of loser stocks (%), daily 25-day average. Topix=daily Source: Tokyo Stock Exchange, SMAM Topix (RHS) up to Dec 17 400 16
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