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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. = 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 18