smam stock market outlook monthly€¦ · after a trump honeymoon rally lifting japanese stocks...
TRANSCRIPT
Japanese Stock Market Outlook
SMAM monthly comments & views - January 2017 -
Japanese Economy
SMAM revised GDP growth forecast for FY2016 from +0.9% to +1.2% and for FY2017 from +0.9% to +1.1% due mainly to change in GDP measurement standard, in which Research & Development spending is counted as capital investment, a part of GDP. By the new measurement standard, Real GDP growth has shifted upward by 0.5% on average for the immediate past 3 years from 2013 to 2015. Nominal GDP in 2015 was substantially revised up to 532 trillion yen surpassing previous high of 531 trillion yen recorded in 2007.
• 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.
• According to the latest BOJ Tankan Business Survey, recovering global economy has positively impacted exports and
production in Japan leading to the improvement in business sentiments both for manufacturing and non-manufacturing
industries.
Japanese Stock Markets
After a Trump honeymoon rally lifting Japanese stocks market-wide in late 2016, focus is going to such factors as (a)strong earnings growth expected in Jan-Mar quarter and onwards, and (b)how Trump policies actually develop both on domestic and international fronts. Current PER over 15x seems a little stretched and the stock market would require some breathing period for the expected earnings growth to be actually achieved.
• 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. As
a main scenario, Trump’s trade policy is expected to focus on bilateral negotiations to open other countries’ markets and
would not be so protectionist as feared.
• 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)
Executive summary
1 Notes: Macro and market views are as of Dec.15th and 19th , 2016 respectively, and subject to updates thereafter without notice
Outlook for Japanese Economy
2
3
SMAM revised GDP growth forecast for FY2016 from +0.9% to +1.2% and for FY2017 from +0.9% to +1.1%
due mainly to change in GDP measurement standard, in which Research & Development spending is counted
as capital investment, a part of GDP.
Forecast for FY2018 was released predicting moderate growth to continue despite plateauing contribution from
the public sector.
Notes: E=SMAM forecasts. SMAM views are as of Dec 15th , 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 FY16-18
( YoY %)
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% 0.9% 3.3% 2.5%
CPI (excl. fresh food) 0.8% 0.9% -0.0% -0.3% 0.7% 0.7%
FY16E FY18EFY13 FY14 FY15 FY17E
4
GDP measurement standard has changed making substantially positive impact
GDP measurement standard has changed this time making clearly positive impact. The biggest change is
counting Research & Development spending as capital investment, a part of GDP.
For the immediate past 3 years from 2013 to 2015, Real GDP growth has shifted upward by 0.5% on average.
By the new measurement standard, Nominal GDP in 2015 was 532 trillion yen surpassing previous high of 531
trillion yen recorded in 2007.
(Source) Cabinet Office, compiled by SMAM
Real GDP YOY Growth (%)
2.6
-0.4
1.3
2.0
-0.9
0.9
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
New measurement(08SNA)
Old measurement(93SNA)
(Year) (Year) (Source) Cabinet Office, compiled by SMAM
Nominal GDP (Trillion yen)
531.0 532.2
513.0
500.6
450
460
470
480
490
500
510
520
530
540
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
千
New measurement(08SNA)
Old measurement(93SNA)
Widening Interest rate gap is one of the factors behind the strong US$ against Japanese yen
Steepening of yield curve continues for US and Europe whereas still kept low in Japan.
FRB in the US decided to hike its policy rate by 0.25% in December FOMC meeting.
Widening interest rate gap is one of the reasons why dollar is moving stronger against Japanese yen.
SMAM forecasts US$/yen range between 112 and 122 for 2017 with a risk for the downside to 105 if US moves
to cap and reverse the dollar strength considering its negative effects on US industries.
5
0
0.5
1
1.5
2
2.5
3
US
Germany
Japan
Government Bond Yield Spread (10Y-2Y)(%)
Note: Weekly data from Jan. 10th, 2014 to Dec. 16th, 2016
(Source) Datastream
(Month/Year)
70
80
90
100
110
120
130
140
▲ 5
▲ 4
▲ 3
▲ 2
▲ 1
0
1
2
3
00 02 04 06 08 10 12 14 16
2YGB US-JP yeild gap(left)
US$/JPY(right)
US$/JPY and US-JP 2Y real yield gap
Note: Real yield "JGB2Y yield - Japan CPI excl. fresh food & energy" for Japan, and "US2Ytreasury yield - US core CPI" for US. Data is up to Dec. 19th 2016.(Source) Bloomberg
(Year)
(%) (yen)
6
CPI forecast was revised upward
Due to underlying firm consumer prices and higher oil & commodity prices, SMAM revised CPI forecast upward.
Now, CPI is forecast to move up to positive territory during 1Q of 2017, which was previously forecast to be in
the middle of 2017.
CPI is forecast to reach +0.9% by the end of 2017 and BOJ is going to refrain from making additional easing
moves in 2017 despite it is still lower than 2% target set by BOJ.
-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
1.6
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
2014 2015 2016 2017 2018
Food (excl. fresh food)
Energy
Baseline CPI (excl. food & energy)
Core CPI (excl. fresh food)
Nationwide CPI and contribution of components(YoY %)
(Source) Ministry of Internal Affairs & Communications
Forecast by SMAM
Note: Effect of consumption tax hike in April 2014 is excluded.(Month/Year)
Business sentiment has been noticeably improving
According to the latest BOJ Tankan Business Survey, recovering global economy has positively impacted
exports and production in Japan leading to the improvement in business sentiments both for manufacturing and
non-manufacturing industries.
DI above zero means more respondents are feeling business conditions getting better than getting worse.
7
(Source) Bank of Japan
BOJ Tankan Business Survey, manufacturing enterprises(all size)
-60
-50
-40
-30
-20
-10
0
10
20
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Current condition DI
Future condition DI
4Q 2016
1Q 2017
(Source) Bank of Japan
BOJ Tankan Business Survey, Non-manufacturing enterprises(all size)
-70
-60
-50
-40
-30
-20
-10
0
10
20
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Current condition DI
Future condition DI
4Q 2016
1Q 2017
(Year) (Year)
Political events should gather attention in 2017
The most important event should be the inauguration of Mr. Donald Trump as the US president on January 20th.
How Trump policies are actually implemented both on domestic side and international trade side can affect
global economy and financial markets.
Europe is going to face important events such as notification of Brexit and elections in France.
Japan has an advantage of stable politics, and PM Abe has a precious opportunity to impress the world by
pushing social reform and growth enhancing strategies forwards.
8
Schedule of key events in the first half of 2017Month Region/Country Events Notes
Ordinary Session of National Diet begins
BOJ perspective report
USA (20th) Donald Trump becomes US president
February Japan First estimate of 4Q 2016 GDP
Convention of the Liberal Democratic Party Extend maximum party leadership from 2 terms running?
Spring wage negotiations
Budget for FY2017 to be approved
Action plan for changing working practice
Netherlands General election
UK Notification of exiting EU?
BOJ Tankan business report
BOJ perspective report
Apr or May France Presidential election
Japan Ordinary Session of National Diet ends
Japan Election for the Tokyo Metropolitan Assembly
France Lower house election
(Source) Various publications, assembled by SMAM
January
March
April
June
Japan
Japan
Japan
Outlook for Japanese Stock Markets
9
Stock market outlook: What could happen after Donald Trump becomes US president ?
SMAM short-term view After a Trump honeymoon rally lifting Japanese stocks market-wide in late 2016, focus is going to such factors
as (a)strong earnings growth expected in Jan-Mar quarter and onwards, and (b)how Trump policies actually develop both on domestic and international fronts. Current PER over 15x seems a little stretched and the stock market would require some breathing period for the expected earnings growth to be actually achieved.
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 extra-easy monetary policy. As a main scenario, Trump’s trade policy is expected to focus on bilateral negotiations to open other countries’ markets and would not be so protectionist as feared.
Note: SMAM’s projection is as of Dec. 19th,, 2016 and subject to updates without notice
10
700
900
1,100
1,300
1,500
1,700
1,900
Jan-1
4
Feb
-14
Ma
r-1
4
Apr-
14
Ma
y-1
4
Jun-1
4
Jul-1
4
Aug-1
4
Sep-1
4
Oct-
14
No
v-1
4
De
c-1
4
Jan-1
5
Feb
-15
Ma
r-1
5
Apr-
15
Ma
y-1
5
Jun-1
5
Jul-1
5
Aug-1
5
Sep-1
5
Oct-
15
No
v-1
5
De
c-1
5
Jan-1
6
Feb
-16
Ma
r-1
6
Apr-
16
Ma
y-1
6
Jun-1
6
Jul-1
6
Aug-1
6
Sep-1
6
Oct-
16
No
v-1
6
De
c-1
6
Jan-1
7
Feb
-17
Ma
r-1
7
Apr-
17
Ma
y-1
7
Jun-1
7
Jul-1
7
Aug-1
7
Sep-1
7
Oct-
17
No
v-1
7
De
c-1
7
TOPIX
Forecast range upside
Forecast range downside
TOPIX index forecast range by SMAM
(Source) TOPIX: Tokyo stock exchange, Forecast by SMAM
(Points)
(Month/Year)
Base scenario & Upside / Downside risks for our forecasts
Our Base Scenario is assuming the following views:
• Global economy keeps on its 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$.
• 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:
• Confrontational foreign policies taken by Trump presidency shake global trades and deepen geo-political
tensions.
• Populism gains in Europe further stabilizing EU.
• Unexpectedly large impact from the process of US monetary policy normalization.
• Concern over emerging economies including China.
11
SMAM’s forecasts as of December 2016
12
Share prices rose to more than offset currency weakness for Europe and Japan in December
12
US stocks continues rallying. Yen based Japanese stock prices also rallied substantially, however, it has not
enough to catch up with yen’s weakening against US$ since US presidential election in November.
Emerging equity markets are having difficult times from stronger US$.
707580859095
100105110115120 MSCI
EM/US$
S&P500
TOPIX/US$
MSCIEurope/US$
TOPIX/Yen
US$ based performance of stock markets (Dec 2015 =100)
(Source) Datastream, MSCI and Tokyo Stock Exchange, compiled by SMAM.
Notes: Month-end data from Dec 2015 to Oct 2016. Dec. 2016 data is as of 19th.
(Month/Year)
13
At the announcement of 2Q results, companies were implicitly forecasting +10.7% profit growth for the
following 6 months between Sep 2016 and Mar 2017.
Yen has substantially depreciated since then and global economy has picked up. SMAM now forecasts
YOY recurring profit growth of 21.8% for the latter half of FY2016 and 11.3% for entire FY2017.
(Note: *Numbers are for 221 companies in SMAM research coverage excluding financials.)
SMAM forecast 21.8% YOY profit increase for Sep 2016-Mar 2017 period
(Source) Toyo Keizai, announcement of each company, compiled by SMAM
Recurring profits forecast by companies as of the end of 2Q 2016
SMAM research coverage of 221 companies excluding financials
FY2015 (from Apr2015 to Mar2016) FY2016 (from Apr2016 to Mar2017) FY2016 FY2017
(yen bil. %)FY2015
total
FY2016
total
1Q(Apr-
Jun)2Q 3Q 4Q
1Q(Apr-
Jun)2Q 3Q 4Q
Recurring
profits9,066 8,264 7,695 4,348 29,365 7,541 7,697 - - 28,571 29,907 33,841
YoY% 28.60% 0.40% 1.10% -26.50% 2.50% -16.80% -6.86% - - -2.71% 1.84% 11.30%
3Q to 4Q tot. 14,669 -
YoY% 21.8% -
US$/yen
Month end
average
(actual)
121.9 121.7 121.2 115.4 120.1 106.8 102.3 112.37* ? ? 107.2** 110**
*As of Dec20th**Assumption for
SMAM forecast
SMAM forecast as of
Dec. 5th 2016
12,043
-11.0%
13,333
10.7%
Yen appreciated by 19%
14
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.)
ROE is on a recovering path to 10% mark expected in 2017
27,547
29,073
29,357 33,107
17,996
17,251
20,105
11,07712,107
13,002
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
200
2/A
200
3/A
200
4/A
200
5/A
200
6/A
200
7/A
200
8/A
200
9/A
201
0/A
201
1/A
201
2/A
201
3/A
201
4/A
201
5/A
201
6/E
201
7/E
(yen bil.)
SMAM 221 companies recurring profits (excl. financials)
Total industries
Manufacturing
Non-manufacturing
(Source) announcement by companies, forecast by SMAM.(Fiscal year)
10.9%
1.7%
4.5%
6.8%
5.0%
6.2%
9.5%
8.9%
8.2%
9.2%
10.0%
0%
2%
4%
6%
8%
10%
12%
200
1A
200
2A
200
3A
200
4A
200
5A
200
6A
200
7A
200
8A
200
9A
201
0A
201
1A
201
2A
201
3A
201
4A
201
5A
201
6E
201
7E
SMAM 221 companies ROE (excl. financials)
Forecast
(Source) announcement by companies, forecast by SMAM.
(Fiscal year)Note: Data label is for the all industries.
PER (Price Earnings Ratio) seems stretched over 15x
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 December 16th, PER for TOPIX was 15.18x based on 12M forward EPS and 14.5x using higher 18M
forward EPS. Stock prices might need breathing space to wait for the estimated earnings growth to be actually
achieved and earnings forecast to be lifted further.
15
300
500
700
900
1,100
1,300
1,500
1,700
1,900
Oct-
07
De
c-0
7F
eb
-08
Apr-
08
Jun-0
8A
ug-0
8O
ct-
08
De
c-0
8F
eb
-09
Apr-
09
Jun-0
9A
ug-0
9O
ct-
09
De
c-0
9F
eb
-10
Apr-
10
Jun-1
0A
ug-1
0O
ct-
10
De
c-1
0F
eb
-11
Apr-
11
Jun-1
1A
ug-1
1O
ct-
11
De
c-1
1F
eb
-12
Apr-
12
Jun-1
2A
ug-1
2O
ct-
12
De
c-1
2F
eb
-13
Apr-
13
Jun-1
3A
ug-1
3O
ct-
13
De
c-1
3F
eb
-14
Apr-
14
Jun-1
4A
ug-1
4O
ct-
14
De
c-1
4F
eb
-15
Apr-
15
Jun-1
5A
ug-1
5O
ct-
15
De
c-1
5F
eb
-16
Apr-
16
Jun-1
6A
ug-1
6O
ct-
16
De
c-1
6
Note: Data is weekly from Oct. 26th 2007 to Dec. 16th 2016. TOPIX was 1550.67 at the end of the period. (Source) Tokyo Stock Exchange, Datastream and IBES, compiled by SMAM
TOPIX
(Month/Year)
TOPIX and PER based on 12-month forward EPS
16x
12x
13x
14x
15x
PM Abe's 2nd term started
Foreign investors purchasing continues to lift stock prices
Foreign investors purchased Japanese stocks by as much as 1.54 trillion yen in November.
Japanese individual investors were selling Japanese stocks as stock prices recovered.
16
(month/ year)
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 Aug Sep Oct Nov Dec
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 exchange up to Dec.9th 2016.
2016 (Month/Year)
17
Japanese stock market is technically overheated
17
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 15th December first time since June 2014.
It’s natural to expect for a breathing period for a while, however, in the previous comparable cases in the
beginning of 2013 and in June 2014, the stock prices did not take visible breaks while this ratio gradually
calmed down.
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
40
60
80
100
120
140
160
180
200
220
240
260
280
300
Gainers/Losers ratio(left axis) and TOPIX(right axis)
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 Dec. 16th 2016
(%)
Points
18
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