Mr Suga's resignation could trigger a sharp rally
Market Development: In early August, we saw a technical rebound from the decline witnessed at the end of last month, which was a result of an increase in COVID-19 infections. In addition, brisk Q1 results came out and the market continued the rally.
In mid-August, the COVID-19 situation worsened as new infections increased rapidly, causing the market to decline. Even though the Dow hit a record high on the back of the US Senate passing the $1 trillion infrastructure package, the upside to Japan was limited. When Toyota announced a 40% production cut compared to its initial plan for September, the market reacted negatively, citing a risk of economic slowdown.
In late August, the Japanese market rallied, seemingly following the peak of new COVID-19 infections, and from following the US market which reacted positively to Fed Chair Powell's statement that it will not hurry to raise interest rates.
In August, the TOPIX closed the month at 1,960.70 (up 3.14% MoM) and the Nikkei 225 at 28,089.54 (up 2.95% MoM). 25 out of 33 sectors gained. The top five performers were Marine Transportation, Steel, Precision Instrument, Services and Pharmaceuticals. The bottom five performers were Oil, Pulp & Paper, Non-Ferrous Metals, Transportation Equipment and Other Products.
The 10-year JGB yield began the month at 0.022, and at one point declined to 0.006 as the US 10-year treasury yield declined. However, on 4th August, when the Fed vice chair commented that he was surprised by how much the US Treasury yields had fallen, JGB yields appreciated, along with US Treasury yields, to over 0.036 before settling and closing the month at 0.025. The JPY against the USD was 109.72 at the beginning of August and ended the month at 110.02.
The Crude oil price started at 73.95 and declined gradually as COVID-19 infections increased globally and concerns arose over the economic recovery. At one point, the price dipped below 62 following Toyota's announcement over production cuts, and economic sensitive names were subsequently sold off, before recovering quickly to end the month at 68.50.
On 3rd September, Mr Yoshihide Suga announced that he would step down as Prime Minister, and would not seek re-election in the Liberal Democratic Party leadership race, scheduled for 29th September. His approval ratio has fallen below 30% as he failed to rein in Japan's COVID-19 outbreak. Some commentators criticised his lack of leadership and communication skills.
Although the LDP was defeated in a few by-elections this year, the Japanese stock market maintained its strong momentum following his announcement, as there is very little chance of the LDP coalition group losing the majority in the next general election, due to be held by the end of November 2021.
The economy remains lacklustre as the State of Emergency was extended to the end of September for Tokyo and many other prefectures. According to the Economy Watchers Survey of Business announced on 8th September, the overall current conditions Diffusion Index (DI) for August 2021 dropped sharply by 13.7 points to 34.7; the lowest since January 2021 (31.2). The business condition outlook DI also declined by 4.7 points to 43.7. That said, there are some positive signs emerging on COVID-19 in Japan.
New daily infections in Japan for Monday 13th September have declined sharply to 4,163 from the peak of 16,869 on Monday 23rd August, as vaccinations are rapidly increasing. Mr Nishimura, the Minister of State for Economic and Fiscal Policy, reported on 12th September that the vaccination rate (double dose) in Japan exceeded 50% now and would be over 60% by the end of September.
Our World in Data states that as of 12th September, the vaccination rates (double dose) against the total population were 65% in the UK, 62% in Germany and 53% in the USA. Judging from national character, we expect that Japan's vaccination rate will rise to over 80% by the end of 2021, probably the highest level among major economies.
The Japanese economy is likely to gradually return to normal conditions from October 2021. One of the major reasons why the Japanese market has been underperforming the US and European markets between March and August 2021 is likely to disappear. In most cases, the general election should be a strong catalyst for the rally. The FRB in the US may start "tapering" within a few months, which could have a temporary impact on global markets, but the impact on the Japanese market should be limited. Instead, we continue to carefully watch the direction of the infrastructure bill in the US, as it could decide the direction of the global economy and market characteristics.
The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese Yen basis as of 31st August 2021 went up 6.35% compared with that of 30th July, whilst the TOPIX TR Index rose 3.17% during the same period. The Fund added one new name to the portfolio (JFE Holdings), with no stocks sold out.
The Fund continues to be overweight in economically sensitive sectors with cheap valuations such as Trading Companies, Marine Transportation, Iron & Steel and Banking, while defensive sectors such as Foods, Pharmaceuticals, Retail and Utilities continue to be avoided. The Fund takes a cautious stance on IT-related sectors.
The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Fund as of 14/09/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.
Author Yutaka Uda
Funds ManagedNippon Growth (UCITS) Fund
Yutaka UdaJapanese EconomyNippon Growth (UCITS) Fundjapan equitiesActive Management