Download Japanese Stock Market Outlook January 2017

Japanese Stock Market Outlook
SMAM monthly comments & views
- January 2017 -
Executive summary
 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)
Notes: Macro and market views are as of Dec.15th and 19th , 2016 respectively, and subject to updates thereafter without notice
1
Outlook for Japanese Economy
2
SMAM economic outlook for FY16-18
 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.
( YoY %)
Real GDP growth
Private Consumption Expenditure
Private Housing Investment
Private Capital Investment
Public Consumption Expenditure
Public Capital Investment
Net Exports (contrib. to GDP growth)
Exports
Imports
Nominal GDP
GDP Deflator
Industrial Production
CPI (excl. fresh food)
FY13
2.6%
2.7%
8.3%
7.0%
1.7%
8.6%
-0.5%
4.4%
7.1%
2.6%
0.0%
3.0%
0.8%
FY14
-0.4%
-2.7%
-9.9%
2.5%
0.4%
-2.1%
0.6%
8.7%
4.1%
2.1%
2.5%
-0.4%
0.9%
FY15
1.3%
0.5%
2.7%
0.6%
2.0%
-2.0%
0.2%
0.8%
-0.2%
2.8%
1.4%
-1.4%
-0.0%
FY16E
1.2%
0.7%
5.7%
1.4%
0.7%
0.1%
0.4%
1.1%
-1.5%
1.3%
0.0%
0.9%
-0.3%
FY17E
1.1%
0.6%
-0.0%
1.5%
1.1%
5.7%
0.2%
2.4%
1.2%
1.6%
0.6%
3.3%
0.7%
FY18E
0.9%
0.6%
1.0%
2.1%
0.9%
0.2%
0.1%
1.7%
1.0%
1.6%
0.7%
2.5%
0.7%
(%, YoY except Net Exports)
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
3
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.
Nominal GDP (Trillion yen)
Real GDP YOY Growth (%)
千
4.0
2.6
3.0
540
520
2.0
1.3
2.0
1.0
532.2
531.0
530
-0.4
0.9
0.0
513.0
510
500.6
500
490
-1.0
480
-0.9
-2.0
-3.0
New measurement(08SNA)
470
Old measurement(93SNA)
460
New measurement(08SNA)
Old measurement(93SNA)
(Year)
(Source) Cabinet Office, compiled by SMAM
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
(Source) Cabinet Office, compiled by SMAM
2000
450
-4.0
(Year)
4
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$/yen range between 112 and 122 for 2017 with a risk for the downside to 105 if US moves
to cap and reverse the dollar strength considering its negative effects on US industries.
(%)
Government Bond Yield Spread (10Y-2Y)
US$/JPY and US-JP 2Y real yield gap
(%)
3
(yen)
140
3
US
2
Germany
1
2.5
130
120
0
2
Japan
110
▲1
1.5
100
▲2
1
90
▲3
0.5
▲4
0
▲5
2YGB US-JP yeild gap(left)
70
00
Note: Weekly data from Jan. 10th, 2014 to Dec. 16th, 2016
(Source) Datastream
(Month/Year)
80
US$/JPY(right)
02
04
06
08
10
12
14
16
(Year)
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
5
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.
(YoY %)
Nationwide CPI and contribution of components
1.8
1.6
1.4
1.2
Forecast by SMAM
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
Food (excl. fresh food)
-0.8
Energy
-1.0
Baseline CPI (excl. food & energy)
-1.2
Core CPI (excl. fresh food)
-1.4
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
Note: Effect of consumption tax hike in April 2014 is excluded.
2016
2017
2018
(Month/Year)
(Source) Ministry of Internal Affairs & Communications
6
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.
BOJ Tankan Business Survey, manufacturing enterprises(all size)
20
4Q 2016
BOJ Tankan Business Survey, Non-manufacturing enterprises(all size)
20
4Q 2016
10
10
0
0
-10
-10
1Q 2017
-20
1Q 2017
-20
-50
Future condition DI
(Year)
(Source) Bank of Japan
2013
2012
2011
2010
2009
2008
2007
2006
2004
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
-70
2006
-60
2005
-60
2004
-50
2005
Future condition DI
2016
Current condition DI
2015
-40
-40
2014
Current condition DI
2017
-30
-30
(Year)
(Source) Bank of Japan
7
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.
Schedule of key events in the first half of 2017
Month
January
February
Region/Country
Japan
Events
Ordinary Session of National Diet begins
BOJ perspective report
USA
(20th) Donald Trump becomes US president
Japan
First estimate of 4Q 2016 GDP
Convention of the Liberal Democratic Party
Japan
March
April
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?
Japan
Apr or May France
June
Notes
BOJ Tankan business report
BOJ perspective report
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
8
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 extraeasy 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.
(Points)
TOPIX index forecast range by SMAM
1,900
1,700
1,500
1,300
1,100
TOPIX
Forecast range upside
900
Forecast range downside
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
700
(Source) TOPIX: Tokyo stock exchange, Forecast by SMAM
(Month/Year)
Note: SMAM’s projection is as of Dec. 19th,, 2016 and subject to updates without notice
10
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.
SMAM’s forecasts as of December 2016
11
Share prices rose to more than offset currency weakness for Europe and Japan in December
 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$.
US$ based performance of stock markets (Dec 2015 =100)
MSCI
EM/US$
120
115
110
105
100
95
90
85
80
75
70
S&P500
TOPIX/US$
MSCI
Europe/US$
TOPIX/Yen
(Month/Year)
Notes: Month-end data from Dec 2015 to Oct 2016. Dec. 2016 data is as of 19th.
(Source) Datastream, MSCI and Tokyo Stock Exchange, compiled by SMAM.
12
SMAM forecast 21.8% YOY profit increase for Sep 2016-Mar 2017 period
 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.)
Recurring profits forecast by companies as of the end of 2Q 2016
SMAM forecast as of
Dec. 5th 2016
SMAM research coverage of 221 companies excluding financials
FY2015 (from Apr2015 to Mar2016)
(yen bil. %)
1Q(Apr2Q
Jun)
Recurring
profits
FY2016 (from Apr2016 to Mar2017)
FY2015
total
9,066
YoY%
28.60%
3Q to 4Q tot.
YoY%
US$/yen
Month end
121.9
average
(actual)
3Q
8,264
0.40%
121.7
1Q(Apr2Q
Jun)
4Q
7,695
4,348
29,365
7,541
7,697
1.10% -26.50% 2.50% -16.80% -6.86%
12,043
-11.0%
121.2
115.4
FY2016
FY2017
FY2016
total
120.1
106.8
102.3
Yen appreciated by 19%
3Q
4Q
-
-
28,571
-
-
-2.71%
?
?
13,333
10.7%
112.37*
*As of Dec20th
29,907
33,841
1.84%
14,669
21.8%
11.30%
-
107.2**
110**
**Assumption for
SMAM forecast
(Source) Toyo Keizai, announcement of each company, compiled by SMAM
13
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.)
SMAM 221 companies recurring profits (excl. financials)
SMAM 221 companies ROE (excl. financials)
(yen bil.)
35,000
33,107
Total industries
29,357
29,073
Manufacturing
30,000
Forecast
10.9%
10.0%
10%
Non-manufacturing
27,547
12%
9.5%
9.2%
8.9%
25,000
8.2%
8%
20,105
20,000
17,996
6.8%
17,251
15,000
12,107
10,000
6.2%
6%
5.0%
13,002
4.5%
4%
11,077
2%
1.7%
5,000
Note: Data label is for the all industries.
(Source) announcement by companies, forecast by SMAM.
2017E
2016E
2015A
2014A
2013A
2012A
2011A
2010A
2009A
2008A
2007A
2006A
2005A
2004A
2003A
2002A
2017/E
2016/E
2015/A
2014/A
2013/A
2012/A
2011/A
2010/A
2009/A
2008/A
2007/A
2006/A
2005/A
2004/A
2003/A
2002/A
(Source) announcement by companies, forecast by SMAM.
(Fiscal year)
2001A
0%
0
(Fiscal year)
14
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.
TOPIX
TOPIX and PER based on 12-month forward EPS
1,900
1,700
PM Abe's 2nd term started
16x
1,500
15x
14x
1,300
13x
12x
1,100
900
700
500
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
300
(Month/Year)
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
15
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.
Net purchasing of Japanese equities by investor type
TOPIX
(points)
Bar charts
(Yen billion)
3,000
1700
2,000
1500
1,000
1300
0
1100
-1,000
900
-2,000
700
Foreign
Trust bank
Individual
Inv. Trust Fund
Business corp
TOPIX
-3,000
500
Jan Feb Mar Apr May Jun
2015
Jul
Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun July Aug Sep Oct Nov Dec
2016
(month/ year)
(Month/Year)
Note: Data is for Tokyo stock exchange and Nagoya stock exchange up to Dec.9th 2016.
(Source) Japan Exchange Group
16
Japanese stock market is technically overheated
 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.
Gainers/Losers ratio(left axis) and TOPIX(right axis)
Points
300
280
260
240
220
(%)
200
180
160
140
120
100
80
60
40
Notes Gainers/Losers ratio = No. of stocks with rising share price / No. of stocks with falling share price (%)
Source: Tokyo Stock Exchange, SMAM
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
(Year/Month)
Up to Dec. 16th 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.
= 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.
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losses and the results of investments, including such losses, belong to the client.
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= 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.
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18