smam stock market outlook monthly...2016/08/04 · notes: macro and market views are as of jul....
TRANSCRIPT
Japanese Stock Market Outlook
SMAM monthly comments & views - August 2016 -
Japanese Economy
PM Abe announced yen 28 trillion fiscal stimulus, among which central and local government budget spending is planned at yen 7.5 trillion. Public sector is going to pull the economy ahead. Private consumption is forecast to show moderate growth whereas private capital investment is forecast to make a solid contribution.
• Inflation expectations are falling and BOJ slightly strengthened monetary easing on 29th of July by doubling the pace of
purchasing Japanese equity ETFs, however, other quantitative easing was not expanded and negative interest rate was
not touched this time.
• Impact of BREXIT on Japan is expected as limited and manageable as long as Japan’s major counter part regions, Asia
and US, keep growing rather solidly.
Japanese Stock Markets
BOJ’s additional easing to double the size of purchasing Japanese Equity ETFs is mildly positive for the stock market, although risk for higher yen remains. Large fiscal spending plan of yen 28 trillion over the coming years will be more or less positive for corporate sentiment.
• After downward revisions for a while, Japanese corporate earnings are expected to hit bottom during Jul-Sep period
and start to grow again, which could drive the stock market to move upward. SMAM forecasts recurring profit growth for
218 companies in SMAM’s research coverage to be +4.0% in FY2016.
• Global economic growth is gradually stabilizing although close attention is required for what effects Britain’s decision to
exit from EU brings in. Fiscal stimulus plan this time is over multiple years utilizing loan programs as well as budget
spending, which SMAM thinks positive compared to the previous cases, which tended to lack in long-term planning.
Executive summary
1
Notes: Macro and market views are as of Jul. 29th and 20th, 2016 respectively, and subject to updates thereafter without notice
Outlook for Japanese Economy
2
3
PM Abe announced yen 28 trillion fiscal stimulus, among which central and local government budget spending
is planned at yen 7.5 trillion. Public sector is going to pull the economy ahead. Private consumption is forecast
to show moderate growth whereas private capital investment is forecast to make a solid contribution.
Inflation expectations are falling and BOJ slightly strengthened monetary easing on 29th of July by doubling the
pace of purchasing Japanese equity ETFs, however, other quantitative easing was not expanded and negative
interest rate was not touched this time.
Notes: E=SMAM forecasts. SMAM views are as of Jul. 29th , 2016 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)
SMAM economic outlook for FY16-17
Real GDP growth 0.9% 2.0% -0.9% 0.8% 0.7% 0.7%
Private Consumption Expenditure 1.7% 2.3% -2.9% -0.2% 0.5% 0.4%
Private Housing Investment 5.7% 8.8% -11.7% 2.4% 1.5% 1.1%
Private Capital Investment 0.9% 3.0% 0.1% 2.0% 1.5% 1.0%
Public Consumption Expenditure 1.5% 1.6% 0.1% 1.5% 1.5% 1.1%
Public Capital Investment 1.0% 10.3% -2.6% -2.7% -0.1% 5.9%
Net Exports (contrib. to GDP growth) -0.8% -0.5% 0.6% 0.1% 0.3% -0.0%
Exports -1.4% 4.4% 7.9% 0.4% 1.7% 1.4%
Imports 3.6% 6.8% 3.4% -0.1% -0.0% 1.8%
Nominal GDP 0.0% 1.7% 1.5% 2.2% 0.7% 0.9%
GDP Deflator -0.9% -0.3% 2.4% 1.4% -0.0% 0.2%
FY15 FY17EFY12 FY13 FY14 FY16E
4
SMAM revised Real GDP forecast for Apr-Jun from -0.5% to +1.1% (annualized) considering better than
anticipated economic indicators released so far such as household survey and private capital investments.
SMAM quarterly economic outlook
Notes: SMAM views are as of Jul. 29th,2016 and subject to updates thereafter without notice. Source: Cabinet Office, Ministry of Economy, Trade and Industry, Ministry of Internal Affairs and Communications, SMAM forecasts .
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2013 2014 2015 2016 2017
Private consumption
Private Housing Investment
Private Capital Investment
Private Inventry Investment
Public consumption expenditure
Public Investment
Net Export
Real GDP
Forecast by SMAM
(QoQ %) Real GDP and contribution by components
5
Impact of BREXIT on Japan is expected as limited and manageable
UK accounted for 6% and 7% in foreign direct investments and its income in 2015. EU’s share was 15% and
11% respectively. In exports from Japan, UK’s share was 2% and EU 9%.
These numbers are not small, however, Japan’s major counter part regions are Asia and US. As long as these
two regions keep growing rather solidly, negative impact of BREXIT on Japanese economy will be limited and
manageable.
US, 15.2, 20%
Asia, 40.3, 53%
EU (ex. UK), 6.7,
9%
UK, 1.3, 2%
Others, 12.1, 16%
Total75.6
(Source) Ministry of Finance, Bank of Japan, compiled by SMAM
Regional distribution of Japanese international activities
*Data is for 2015. Exhibited are region, trillion yen, and % of total.
Direct foreign investments Exports Income from
direct foreign investments
US, 49.8, 34%
Asia, 42.5, 29%
EU (ex. UK), 22.2,
15%
UK, 10.4, 7%
Others, 22.9, 15%
Total147.8
US, 3.1, 29%
Asia, 4.4, 40%
EU (ex. UK), 1.2,
11%
UK, 0.7, 6%
Others, 1.5, 14%
Total10.8
6
Positive effect is expected from the fiscal stimulus measures for the medium term
On 2nd August, Cabinet office has decided on the fiscal spending plan to be sent to the next National Diet
session for approval. Total size is advertised to be yen 28 trillion, among which yen 7.5 trillion is directly spent
by central and local government budgets, and the rest is financed by loan programs.
Infrastructure spending is going to play a major role with the total size of yen 13.7 trillion, among which a) “21st
century projects” such as Linier High Speed Train and marine ports for cruise liners take yen 10.7 trillion and b)
“recovery from earthquakes and enhancing safety & protection against natural disasters” take yen 3 trillion.
Other measures include increasing minimum wage, supporting child & elderly care and giving benefit to low
income households.
15
16
17
18
19
20
21
22
23
24
25
26
2005 06 07 08 09 10 11 12 13 14 15 16 17 18
Real Public Capital Formation
Forecast including stimulus measures
Baseline forecast without stimulus measures
Forecast of Real Public Capital Formation (as a component of GDP, annualized)( trillion yen)
(Source) Cabinet Office, compiled by SMAM
SMAM forecast
7
Where the yen is heading ?
One thing worthy of note is the fact that pressure for the stronger yen from the inflation difference has ceased.
Inflation rate in Japan has risen while global inflation in general has substantially declined. This is exhibited as
sideways move of PPP lines on the chart for the last several years.
Historically, PPP based on CPI worked as the weaker end for Yen against US dollars, which was also the case
this time after the beginning of Abenomics so far.
Yen/Dollar rate seems to have been moving around PPI based PPP rate for the last 15 years and current rate is
also close to it.
0
50
100
150
200
250
300
350
400
1971 1976 1981 1986 1991 1996 2001 2006 2011 2016
Yen/US$ rate PPP based on PPIPPP based on CPI PPP based on export price index
Purchasing Power Parity (PPP) exchange rates for Yen/US$
Note: PPP rates are calculated based on the yen/US$ rate of 265.96 as of Mar. 1973 and each price indices in Japan and US.(Source) US Department of Labor, US Department of Commerce, FRB, Bank of Japan, Ministry of Internal Affairs and Communication, and IMF, compiled by SMAM
(Yen)
8
Current balance is going to stay substantially positive in spite of only mild trade surplus
Current balance of Japan has almost recovered to historically high level, which is positive for the strength of
national finance.
Compared to 2000’s, trade surplus stays very mild this time, which is not a bad sign as recent current surplus is
sustained by income from foreign investments rather than massive exports since the latter could potentially
cause fragility to external economic shocks.
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
Trade balance
Current balance
Forecast by SMAM
Trade balance & Current balance as % of GDP
(Source) Ministry of Finance, Bank of Japan
9
Increase in number of employees is driving the growth in aggregated real income
Nominal wage increase seems to be in declining momentum recently, probably due to the rising cautiousness
among management of companies in global uncertainties.
If you look at it from a different angle, however, aggregated real income has been increasing rather solidly
driven by increase in number of employees, which is surely one of the underlying strengths of the Japanese
economy.
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
2012 2013 2014 2015 2016
Nominal wage
Number of employees
Inflation
Aggregated employees real income
(Source) Ministry of Health, Labor and Welfare
(%)
Aggregated employees' real income and contribution by components (YoY%)
Outlook for Japanese Stock Markets
10
Stock market outlook: waiting for effects of fiscal stimulus and global economic recovery
SMAM short-term view BOJ made additional easing on 29th July by doubling the size of purchasing Japanese Equity ETFs to annual
yen 6 trillion, which is mildly positive for the stock market, although risk for higher yen remains. Large fiscal spending plan advertised to be yen 28 trillion will be more or less positive for corporate sentiment.
Longer-term outlook (6-months and beyond) After downward revisions for a while, Japanese corporate earnings are expected to hit bottom during Jul-Sep
period and start to grow again, which could drive the stock market to move upward. SMAM forecasts recurring profit growth for 218 companies in SMAM’s research coverage to be +4.0% in FY2016.
Global economic growth is gradually stabilizing although close attention is required for what effects Britain’s decision to exit from EU brings in. Fiscal stimulus plan this time is over multiple years, which SMAM thinks positive compared to the previous cases, which tended to lack in long-term planning.
Note: SMAM’s projection is as of Jul. 20th 2016 and subject to updates without notice
11
700
900
1,100
1,300
1,500
1,700
1,900
Ja
n-1
3
Fe
b-1
3M
ar-
13
Ap
r-1
3
Ma
y-1
3
Ju
n-1
3
Ju
l-1
3
Au
g-1
3
Se
p-1
3
Oct-
13
No
v-1
3
De
c-1
3
Ja
n-1
4
Fe
b-1
4M
ar-
14
Ap
r-1
4
Ma
y-1
4
Ju
n-1
4
Ju
l-1
4
Au
g-1
4
Se
p-1
4
Oct-
14
No
v-1
4
De
c-1
4
Ja
n-1
5
Fe
b-1
5M
ar-
15
Ap
r-1
5
Ma
y-1
5
Ju
n-1
5
Ju
l-1
5
Au
g-1
5
Se
p-1
5
Oct-
15
No
v-1
5
De
c-1
5
Ja
n-1
6
Fe
b-1
6M
ar-
16
Ap
r-1
6
Ma
y-1
6
Ju
n-1
6
Ju
l-1
6
Au
g-1
6
Se
p-1
6
Oct-
16
No
v-1
6
De
c-1
6
Ja
n-1
7
Fe
b-1
7M
ar-
17
TOPIX
Forecast range upside
Forecast range downside
TOPIX index forecast range by SMAM
(Source) TOPIX: Tokyo stock exchange, Forecast by SMAM
(Points)
Base scenario & Upside / Downside risks for our forecasts
Our Base Scenario is assuming the following views:
• Global economy does not enter into a recession.
• Japan’s private consumption to grow mildly supported by wage growth.
• Japanese corporate earnings growth to gradually recover from the negative shock of stronger yen.
• Fiscal stimulus and further monetary easing will be made to sustain economic growth in Japan.
Upside Risks include:
• Stronger-than-expected global growth.
• Stronger-than-expected measures by the Abe government.
Downside Risks include:
• Britain’s decision to exit from EU deeply confuses politics and economies in Europe.
• Unexpectedly large impact from the process of US monetary policy normalization.
• Concern over emerging economies including China.
• Falling oil price causes disastrous problem for oil producing countries.
• Increasing geopolitical concerns.
12
13
According to IBES, downward earnings revision is continuing at the moment. This is probably because
the current yen/dollar rate at around 105 is stronger than the assumptions for the exchange rate used
in forecasting earnings.
Currently, downward earnings forecast revisions are continuing probably adjusting to stronger yen
SMAM Corporate Earnings forecasts (218 Companies research coverage excl. financials)
Fiscal year FY 2014 FY 2015
Date of forecast Actual Actual as of 10th Jun 2016 as of 10th Jun 2016
Revenue (YoY %) 3.9% 0.1% -0.8% 2.7%
Operating Profits (YoY %) 3.1% 9.1% 0.6% 9.4%
Recurring Profits (YoY %) 4.5% 2.5% 4.0% 10.1%
Net Profits (YoY %) 5.4% -3.2% 12.5% 11.4%
Recurring profits (YoY %)
Manufacturing 135 companies 4.1% 0.2% 2.3% 11.1%
Non-manufacturing 83 companies 5.2% 6.5% 6.7% 8.4%
Note:Key assumptions for the forecasts, Yen/US$ 110, Yen/EUR 125, Crude oil $45/barrel
(Source) SMAM
FY 2016E FY 2017E
-30%
-20%
-10%
+0%
+10%
+20%
+30%
2011 2012 2013 2014 2015 2016
TOPIX Earnings Forecast Revision Index
Notes: Revision index= % of Analyst upgrades out of total Topix firms - % of downgrades. Calender year, weeklySource: IBES, SMAM Up to Jul. 18th 2016
PER is in the lower half of the range for the current PM Abe’s tenure
Since Abenomics started, PER for Japanese stock market, TOPIX index-wise, has been in a range between 12x
and 16x except for temporary overshooting.
Even considering further down-revision in earnings, current TOPIX level does not look expensive.
14
300
500
700
900
1,100
1,300
1,500
1,700
1,900
Jan-0
7M
ar-
07
Ma
y-0
7Jul-0
7S
ep-0
7N
ov-0
7Jan-0
8M
ar-
08
Ma
y-0
8Jul-0
8S
ep-0
8N
ov-0
8Jan-0
9M
ar-
09
Ma
y-0
9Jul-0
9S
ep-0
9N
ov-0
9Jan-1
0M
ar-
10
Ma
y-1
0Jul-1
0S
ep-1
0N
ov-1
0Jan-1
1M
ar-
11
Ma
y-1
1Jul-1
1S
ep-1
1N
ov-1
1Jan-1
2M
ar-
12
Ma
y-1
2Jul-1
2S
ep-1
2N
ov-1
2Jan-1
3M
ar-
13
Ma
y-1
3Jul-1
3S
ep-1
3N
ov-1
3Jan-1
4M
ar-
14
Ma
y-1
4Jul-1
4S
ep-1
4N
ov-1
4Jan-1
5M
ar-
15
Ma
y-1
5Jul-1
5S
ep-1
5N
ov-1
5Jan-1
6M
ar-
16
Ma
y-1
6Jul-1
6
Notes: TOPIX: calender year and week-end, P/E ratio is based on 12-month forward EPS of IBESSource: TOPIX: Tokyo Stock Exchange, 12 month forward EPS of IBES: SMAM
TOPIX
Data is up to Jul.15th 2016 when TOPIX was 1317.10
TOPIX and PER based on 12-month forward EPS
16x
12x
13x
14x
15xPM Abe's 2nd term started
Is declining business momentum going turn around on much awaited fiscal spending plan?
BOJ makes broad based business survey every quarter and releases its result in early Jan. Apr. Jul. and Oct.
Manufacturing sector is showing some resilience after the decline in 1Q this year. On the other hand, robust
sentiment of non-manufacturing sector is gradually losing steam.
If the next fiscal spending plan can boost business sentiment again or not is important for the Japanese
economy and corporate earnings.
15
-30
-20
-10
0
10
20
30
1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q F
2010 2011 2012 2013 2014 2015 2016
Large manufacturing enterprises Large non-manufacturing enterprises
Current condition DI
Future condition DI
BOJ "Tankan" business survey, current & future condition DI(*DI above zero indicates the condition is improving)
(Source) Bank of Japan
Domestic investors were buying in June. Foreign investors turned net buyers in July.
Selling from foreign investors ceased and net purchasing was observed in the 1st half of July.
Domestic investors such as pension funds, business corporations have been constantly buying equities.
16
500
700
900
1100
1300
1500
1700
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun July
Net purchasing of Japanese equities by investor type
Foreign Trust bank Individual Inv. Trust Fund Business corp TOPIX
2015
TOPIX (points)
Bar charts (Yen billion)
(Source) Japan Exchange Group
Note: Data is for Tokyo stock exchange and Nagoya stock exchangeData for June is from May 30 th to Jul. 1st. and for Jul is from Jul.4th to 15th. Up to Jul. 15th 2016
2016
17
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.
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