Japanese Stock Market Outlook SMAM monthly comments & views - November 2017 -
Executive summary Japanese Economy PM Abe led governing coalition parties won the lower house election on October 22nd. Current economic reform as well as extra easy monetary policy will continue, though a lot of political power might be consumed for debating the constitutional change. Good economic fundamentals continue for Japan supported by solid growth by each segment. BOJ Tankan business survey in September showed robust business sentiment for both manufacturing and nonmanufacturing companies. Both in Purchasing Power Parity and real yield differentials, current USD/JPY exchange rate around 110 seems to be appropriate. Future course will depend on how inflation and interest rates move in both countries. Japanese Stock Markets After renewing the record of consecutive days of rising, the Japanese stock market is going to have a breather in the short term. Robust economic and business fundamentals should support the stock prices. The biggest domestic event, general election, is now behind and the focus is back on overseas events such as North Korea and US politics. In the long-term, the global economy is expected to grow in a steady undertone. Earnings for the Japanese companies are expected to be revised upward, which will provide the stimulus to the stock market. Risk factors are such as North Korea situation, possible slowdown in Chinese economy, US budget debate and effects of monetary policy change in EU and US. Notes: Macro and market views are as of Oct 23 rd 2017, and subject to updates thereafter without notice. 1
Outlook for Japanese Economy 2
SMAM economic outlook for FY17-18 Good economic fundamentals continue for Japan supported by solid growth by each segment. CPI is expected to rise just mildly. ( YoY %) FY13 FY14 FY15 FY16 FY17E FY18E Real GDP growth 2.6% -0.5% 1.3% 1.3% 1.5% 1.1% Private Consumption Expenditure 2.7% -2.6% 0.6% 0.7% 1.3% 0.7% Private Housing Investment 8.3% -9.9% 2.8% 6.6% 2.4% 2.3% Private Capital Investment 7.0% 2.4% 0.6% 2.4% 3.0% 2.7% Public Consumption Expenditure 1.7% 0.4% 2.0% 0.4% 0.7% 0.7% Public Capital Investment 8.6% -2.1% -1.9% -3.2% 3.4% -1.4% Net Exports (contrib. to GDP growth) -0.5% 0.6% 0.1% 0.7% 0.2% 0.2% Exports 4.4% 8.8% 0.7% 3.2% 5.1% 3.0% Imports 7.1% 4.3% 0.2% -1.4% 3.6% 1.7% Nominal GDP 2.6% 2.0% 2.7% 1.1% 1.6% 1.7% GDP Deflator 0.0% 2.5% 1.5% -0.2% 0.1% 0.5% Industrial Production 3.0% -0.4% -1.4% 1.5% 4.5% 2.5% CPI (excl. fresh food) 0.8% 0.9% -0.1% -0.2% 0.6% 0.7% Notes: E=SMAM forecasts. SMAM views are as of Oct. 23 rd (%, YoY except Net Exports), 2017 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
IMF revised world economic growth forecast upward in October World economic growth is gathering momentum, which is supportive for the stock markets. IMF World Economic Outlook GDP (YOY%) As of October 2017 Change from the forecast in July 2016 2017 2018 2017 2018 (H) (F) (F) World 3.2 3.6 3.7 0.1 0.1 Advanced Economies 1.7 2.2 2.0 0.2 0.1 USA 1.5 2.2 2.3 0.1 0.2 Euro area 1.8 2.1 1.9 0.2 0.2 Japan 1.0 1.5 0.7 0.2 0.1 UK 1.8 1.7 1.5 0.0 0.0 Developing Economies 4.3 4.6 4.9 0.0 0.1 CIS 0.4 2.1 2.1 0.4 0.0 Emerging Asia 6.4 6.5 6.5 0.0 0.0 China 6.7 6.8 6.5 0.1 0.1 India 7.1 6.7 7.4 0.5 0.3 ASEAN5 4.9 5.2 5.2 0.1 0.0 Emerging Europe 3.1 4.5 3.5 1.0 0.3 Latin America 0.9 1.2 1.9 0.2 0.0 Brazil 3.6 0.7 1.5 0.4 0.2 Mexico 2.3 2.1 1.9 0.2 0.1 (Source) IMF, compiled by SMAM Change from the forecast in July (2017+2018) Advanced Economies USA Euro area Japan UK Developing Economies CIS Emerging Asia China India ASEAN5 Emerging Europe Latin America (% change) -1.0-0.5 0.0 0.5 1.0 1.5 4
Private consumption growth remains moderate meanwhile consumer sentiment is improving After a robust growth in 2Q 2017, private consumption has lost some momentum lately. Extremely rainy August was partly blamed for this slow down. However, consumer sentiment actually improved in recent months as Economy Watchers DI showed. Job security in a tight labor condition is one of the positive factors behind. Economy Watchers DI Consumption Activity Index (total) (2010=100, seasonally adjusted, foreign visitors consumption adjusted) 60 109 107 105 103 101 99 97 95 93 08 09 10 11 12 13 14 15 16 17 50 40 30 20 10 51.3 (Year) Note: Data is from Jan. 2008 to Aug. 2017 (Source) Bank of Japan Notes: Diffusion indices of "Economy Watchers Survey". DI above 50 means condition is improving. Data period is from Jan. 2006 to Sep 2017. (Source) Cabinet Office 5
Labor market gets tighter and tighter Number of unfilled job vacancy keeps climbing in the face of decreasing number of job seekers. (times) 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 Job vacancy/ seekers ratio (seasonally adjusted) Number of job vacancy and job seekers (seasonally adjusted) (0000's) 280 260 240 220 200 0.8 0.7 180 Job vacancy Job seekers 0.6 2012 2013 2014 2015 2016 2017 160 2012 2013 2014 2015 2016 2017 Note: Data is from Jan 2012 to Aug 2017. (Source) Ministry of Health, Labour and Welfare (Year) (Year) 6
Strong export growth continues to drive the Japanese economy Drop in export volume in September is going to be temporary due to such as hurricanes in US and a reversal from extremely strong August results. Export volume to US (seasonally adjusted, yen billion) 1500 1400 1300 1200 7200 7000 6800 6600 6400 6200 6000 5800 5600 5400 2010 2011 Total export volume (seasonally adjusted, yen billion) 2012 Note: Data is from Jan 2010 to Sep 2017. (Source) Ministry of Finance, Bank of Japan, compiled by SMAM. 1100 1000 900 800 700 600 4000 3900 3800 3700 3600 3500 3400 3300 3200 3100 3000 Export volume to Asia (seasonally adjusted, yen billion) 2010 2011 2012 2013 2014 2015 2016 2013 2017 2014 2015 2016 2017 (Year) 2010 2011 2012 2013 Note: Data is from Jan 2010 to Sep 2017. (Source) Ministry of Finance, Bank of Japan, compiled by SMAM. 2014 2015 2016 2017 (Year) Note: Data is from Jan 2010 to Sep 2017. (Source) Ministry of Finance, Bank of Japan, compiled by SMAM. (Year) 7
Business sentiment is at a historically high level for both manufacturing & non-manufacturing BOJ Tankan business survey in September showed robust business sentiment for both manufacturing and non-manufacturing companies. The DI for the current condition was 15 and 14 for manufacturing and non-manufacturing respectively, rising from the previous survey. BOJ "Tankan" business survey Current condition DI Future condition DI 20 10 0-10 -20-30 -40-50 All manufacturing All non-manufacturing -60-70 (Year) Notes: Data is quarterly from 1Q 2004 to 3Q 2017. DI above 0 means the condition is improving. (Source) Bank of Japan 8
Current USD/JPY rate is at a theoretically appropriate level Both in Purchasing Power Parity and real yield differentials, current USD/JPY exchange rate around 110 seems to be appropriate. Future course will depend on how inflation and interest rates move in both countries. Japan suffered from deflation for a long time while the rest of the world was more or less having inflation, which drove JPY stronger. However, after BOJ started bold monetary easing in 2013, deflation in Japan stopped and inflation in the rest of the world dramatically declined 400 350 300 250 200 150 100 50 0 USD/JPY rate compared to various Purchasing Power Parity (PPP) adjusted rates Actual rate PPI based CPI based Export price based 125.3 96.3 56.1 (Year) Note: Data is from Mar. 1973 to Aug. 2017 (Source) US Department of Labor, US Department of Commerce, FRB, IMF, Ministry of Internal Affairs and Communications, Bloomberg USD/JPY rate and differential of real yields of (%) 10Y government bonds (US-JP) (Yen) 3.0 2.0 1.0 0.0 1.0 2.0 3.0 10Y real yield differential (left) USD/JPY (right) 4.0 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 (Year) Note: Data is from Jan 31st 2003 to Oct 16th 2017. Real yields are adjusted for CPI ex. food & energy (Source) US Department of Labor, Ministry of Internal Affairs and Communications, Bloomberg, compiled by SMAM. 140 130 120 110 100 90 80 70 9
Long bond yields have not headed upward yet despite robust economic growth Despite robust economic growth, long-term bond yields are not rising yet on the back of low inflation. (%) 3.5 3 10 year Government Bond Yield US 10Y Germany 10Y Japan 10Y 2.5 2 1.5 1 0.5 0-0.5 Note: Weekly data from Jan. 10th, 2014 to Oct. 20th, 2017 (Source) Datastream (Month/Year) 10
CPI is expected to stay just mildly positive Core CPI, which excludes fresh food, is going to stay mildly positive for the foreseeable future. Extra-easy monetary policy is going to continue in Japan despite expected tapering in Europe and US. (YoY %) 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0-0.2-0.4-0.6-0.8-1.0-1.2-1.4 Nationwide CPI and contribution of components 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 2014 2015 2016 2017 2018 2019 0.70 Forecast by SMAM Food (excl. fresh food) Energy Baseline CPI (excl. food & energy) Core CPI (excl. fresh food) Note: Effect of consumption tax hike in April 2014 is excluded. (Month/Year) (Source) Ministry of Internal Affairs & Communications 11
The governing coalition parties got credentials from the Japanese people at the general election PM Abe led governing coalition parties won the lower house election on October 22 nd. Not only securing majority by winning more than 233 seats, LDP and Komeito together maintained more than two thirds (310) of the total seats, which is required for proposing constitutional change. The party of hope and Ishin are also pro-constitutional-change parties, which gets this sensitive agenda more likely to move forward. Current economic reform as well as extra easy monetary policy will continue, though a lot of political power might be consumed for debating the constitutional change. LDP Komei Ishin Hope Independent Constitutional Democratic Party SDP Communist Vacant Total Oct. 22nd results Total 465 seats Before the election total 475 seats 284 29 11 50 22 55 2 12 0 465 284 34 14 57 45 15 2 21 3 475 LDP Komei Ishin Hope Independent Constitutional Democratic Party SDP Communist Vacant Oct. 22nd results Total 465 seats Before the election total 475 seats 0 310 (Source) YOMIURI NEWS PAPER 12
Politics and anticipated tapering by both FRB and ECB could affect financial markets US political battle including the budget for the next fiscal year will intensify heading to the end of CR in December. PM Abe has a new credentials from Japanese people now. Constitutional change is going to be the biggest political agenda for PM Abe, meanwhile economic policies need to be pushed forward more aggressively. Schedule of key events Month Region/Country Events Notes Spain 1 Referendum in Catalonia for independence 22 General election Governing coalition won the election. Japan October 30-31 BOJ Monetary Policy Committee Meeting/ Perspective report EU 26 ECB policy meeting Start of tapering? China 19th National People's Congress November Middle East 30 OPEC meeting US/Asia US president Trump is expected to visit Asia incl. Japan 12-13 FOMC Rate hike? US December 15 3 month extended CR (temporary government budget) ends Political battle in US congress Korea 20 Presidential election 2018 National Diet ordinary session begins Japan January 22-23 BOJ Monetary Policy Committee Meeting/ Perspective report February US 3 FRB chair Yellen's term ends Who are the next candidates? March Japan 19 Two deputy governors' term ends April Japan 8 BOJ governor Kuroda's term ends Who is next BOJ governor? (Source) Various publications, assembled by SMAM 13
Outlook for Japanese Stock Markets 14
Stock market outlook: Solid footage on good fundamentals with North Korean risk remains SMAM short-term view After renewing the record of consecutive days of rising, the Japanese stock market is going to have a breather in the short term. Robust economic and business fundamentals should support the stock prices. The biggest domestic event, general election, is now behind and the focus is back on overseas events such as North Korea and US politics. Longer-term outlook (6-months and beyond) The global economy is expected to grow in a steady undertone. Earnings for the Japanese companies are expected to be revised upward, which will provide stimulus to the stock market. Risk factors are such as North Korea situation, possible slowdown in Chinese economy, US budget debate and effects of monetary policy change in EU and US. (Points) 2100 1900 1700 1500 1300 1100 900 700 TOPIX index forecast range by SMAM 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 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Note: Topix data is from Jan. 5th 2015 to Oct. 19th 2017. (Source) TOPIX: Tokyo stock exchange, Forecast by SMAM Note: SMAM s projection is as of Oct. 23 rd 2017 and subject to updates without notice. TOPIX Forecast range upside Forecast range downside (Month/Year) 15
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. US economy keeps growing despite delay in Trump stimulus policies. Japan s private consumption to grow mildly supported by wage growth. Japanese yen does not get extremely stronger beyond 100 yen against US$. Further fiscal stimulus will be made and extra easy monetary policy should sustain economic growth in Japan. Tension in the East Asia does not ignite a war. Upside Risks include: Stronger-than-expected global growth. Stronger-than-expected measures by the Abe government. Downside Risks include: Confrontational foreign policies taken by Trump presidency shake global trades. Trump policies for stimulating US economy fail to pass US congress. Russia-gate scandal flares up. Populism gains in Europe further destabilizing EU. Heightening geo-political tensions in Middle East & East Asia. Rekindled concern over emerging economies including China. Note: SMAM s projection is as of Oct. 23 rd 2017 and subject to updates without notice. 16
Japanese stock market made a catch-up move lately meanwhile emerging market leads the league Emerging market continued to rise strongly. Japanese stock prices in US dollars rose to make a catch-up move to US peers. 150 MSCI 140 EM/US$ 130 120 110 100 90 80 70 US$ based performance of stock markets (Dec 2015 =100) S&P500 TOPIX/US$ MSCI Europe/US$ TOPIX/Yen Notes: Data is up to Oct. 19th 2017. (Month/Year) (Source) Datastream, MSCI and Tokyo Stock Exchange, compiled by SMAM. 17
Comparing EPS growth and PER, US looks expensive PER rose in September due to rise in share price, meanwhile 12M forward EPS forecast declined after robust EPS growth in 2Q 2017 went behind. Asia looks attractive with the highest EPS growth and the lowest PER among 4 indices, though risk needs to be put into consideration as well. US looks expensive. Japan looks more attractive than Europe with higher EPS growth and lower PER, though the difference is not large. (times) PER of MSCI country indices (%) EPS growth of MSCI country indices 20 18.0 18 16 14 12 18.19 15.03 14.31 13.04 16.0 14.0 12.0 10.0 8.0 13.33 11.19 10.12 9.76 10 8 6 MSCI Europe MSCI AC Asia ex JP USA Japan 6.0 4.0 2.0 0.0 MSCI Europe MSCI AC Asia ex JP USA Japan Note: PER is based on 12M forward EPS forecast. Data is up to 30th Sep 2017. (Source) MSCI (DD/MM/YYYY) Note: Growth is for 12M forward EPS forecast. Data is up to 30th Sep 2017. (Source) MSCI (DD/MM/YYYY) 18
Foreign investors bought back Japanese shares in October Foreign investors turned to purchasing Japanese shares in October. BOJ s ETF purchasing has been absent so far in October meanwhile individuals are still selling shares. Bar charts (Yen billion) 2,000 1,500 Net purchasing of Japanese equities by investor type TOPIX (points) 1700 1,000 1500 500 0-500 1300 1100-1,000 900-1,500-2,000-2,500 700 Foreign Trust bank Individual Inv. Trust Fund Business corp BOJ ETF TOPIX 500 Jan Feb Mar Apr May Jun July Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun July Aug Sep Oct 2016 2017 Note: Data is for Tokyo stock exchange and Nagoya stock exchange up to Oct.13th 2017. (Month/Year) BOJ ETF figure is officially released data from BOJ. (Source) Japan Exchange Group, Bank of Japan 19
Japanese companies are increasing dividends and share buybacks Total of dividend and share buyback amount renewed a historical record in FY2016 and expected to rise further. Total shareholder return, which is the percentage of shareholder earnings returned to shareholders by way of dividend & share buyback, was 43.5% in FY2016, which is expected to increase just marginally in FY2017 and FY2018. (JPY tn) 20 18 Dividend payments & Share buyback by listed firms Share Buyback Total(LHS) Forecast (%) 100 90 16 Aggregate Dividends(LHS) 80 14 Total Shareholders Return(RHS) 70 12 60 10 50 8 40 6 30 4 20 2 10 0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Notes : For ordinary shares of listed firms excluding lossmakers or subsidiaries Source : Toyo Keizai, Quick, I-N Information Systems, Daiwa Securities forecasts 0 (FY) 20
Increasing shareholder returns lifted ROE to 9.9% in FY 2016 ROE rose to 9.9% in FY2016 from 8.5% recorded in FY2015. EPS rose by 18.3%. After hitting the previous high of 9.5% in FY2013, ROE actually declined due to rapidly accumulating capital despite EPS growth. However, growth of shareholder capital in FY 2016 was controlled at 5.7% owing partly to increasing dividend and share buybacks. Profit margin improvement was also positive for ROE. 14% 12% 10% 8% 6% 4% 2% 0% -2% 2001A 0.9% 2002A 5.4% 2003A ROE for SMAM research coverage 224 companies 8.2% 2004A 10.8% 10.8% 9.8% 2005A 2006A 2007A 10.8% 2008A 1.8% 2009A 4.5% 2010A 6.8% 2011A 5.0% 6.2% 9.9% 9.5% 8.9% 8.5% Total 224 (excl. financials) Manufacturing 134 Non-manufacturing 90 Note: Forecast is as of 5th Sep 2017. Displayed numbers are for total companies. (Source) SMAM Corporate Research Group 2012A 2013A 2014A 2015A 2016A SMAM forecast 2017E (Fiscal year) 10.5% 2018E 10.3% 21
SMAM forecasts 15% profit growth in FY2017 Apr-Jun quarterly earnings were upbeat and SMAM revised FY2017 profit growth forecasts from previous 12.1% to 15.1% in recurring profits. Forecasts made by companies stay at 7.4%. SMAM is expecting this guidance to be revised upward as the year progresses. Jul-Sep quarterly earnings results are going to be announced from late October to November. SMAM Corporate Earnings forecasts (224 Companies research coverage excl. financials) Fiscal year FY 2015 FY 2016 FY 2017E FY 2018E Date of forecast Actual Actual as of 5th Sep 2017 as of 5th Sep 2017 Revenue (YoY %) 0.7% -3.4% 6.4% 2.1% Operating Profits (YoY %) 11.8% -1.3% 14.3% 8.2% Recurring Profits (YoY %) 4.5% 2.1% 15.1% 8.3% Net Profits (YoY %) -0.6% 18.3% 10.1% 7.9% Recurring profits (YoY %) Manufacturing 134 companies 3.5% -3.5% 16.9% 9.4% Non-manufacturing 90 companies 6.2% 11.4% 12.5% 6.5% Self guidance by 224 companies 7.4% Note: Key assumptions for the forecasts for FY 2017, Yen/US$ 110.4, Yen/EUR 128.8 (Source) SMAM Corporate Research Group, Toyo Keizai 22
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/indices 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. Registered Number: Kanto Local Finance Bureau (KINSHO) No.399 Member of Japan Investment Advisers Association, The Investment Trusts Association, Japan and Type Ⅱ Financial Instruments Firms Association Sumitomo Mitsui Asset Management Company, Limited 23