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Japanese Stock Market Outlook
SMAM monthly comments & views - November 2015 -
Japanese Economy
Japanese economy is likely to stay under pressure from sluggish external demand for a while. Policy measures taken in China and their effectiveness hold a key. Fiscal and monetary measures can be expected in Japan early next year, which should lift Japanese economy to be back on a recovery path again.
• GDP forecast for FY2015 was downgraded from +0.7% to +0.6% due mainly to weaker exports and private capital
investment. Forecast for FY2016 was also downgraded from +1.1% to +0.9%.
• For FY2016, private sector is expected to show a reasonable growth, consumption at +1.8%, housing investment at
+4.3% and capital investment at +2.1%. Contraction in the public capital investment is the main drag, for which “special
spending program of reconstruction from the earthquake and tsunami in 2011” comes to an end.
Japanese Stock Markets
Risk-off mode has moderated somehow, which made global markets to rebound lately. The Japanese stock market will be in a range bound move for the short term until expected fiscal and monetary measures are brought in early next year though downside risk seems limited with low valuation for the stock market.
• Corporate earnings are expected to keep growing despite increasing pressure on top-line sales. Lower costs
such as energy and materials have been supportive so far. Some caution is required as analysts are revising
earnings forecasts more often downward than upward recently.
• Since Abenomics started, PER for Japanese stock market, in TOPIX index, has been in a range between 13x
and 16x. Current PER below 14x is in a lower side of this range and downside for the stock market seems
limited.
Executive summary
1
Notes: Macro and market views are as of October16th and 21st 2015 respectively, and subject to updates thereafter without notice
Outlook for Japanese Economy
2
3
GDP forecast for FY2015 was downgraded from +0.7% to +0.6% due mainly to weaker exports and private
capital investment. Forecast for FY2016 was also downgraded from +1.1% to +0.9%.
For FY2016, private sector is expected to show a reasonable growth, consumption at +1.8%, housing
investment at +4.3% and capital investment at +2.1%. Contraction in the public capital investment is the main
drag, for which “special spending program of reconstruction from the earthquake and tsunami in 2011” comes
to an end.
Notes: E=SMAM forecasts. SMAM views are as of Oct16th, 2015 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 FY15-16
Real GDP growth 1.0% 2.1% -0.9% 0.6% 0.9%
Private Consumption Expenditure 1.8% 2.5% -3.1% 0.2% 1.8%
Private Housing Investment 5.7% 9.3% -11.7% 2.9% 4.3%
Private Capital Investment 1.2% 4.0% 0.5% 1.1% 2.1%
Public Consumption Expenditure 1.5% 1.6% 0.4% 1.1% 0.2%
Public Capital Investment 1.0% 10.3% 2.0% 1.0% -0.1%
Net Exports (contrib. to GDP growth) -0.8% -0.5% 0.6% -0.4% -0.4%
Exports -1.4% 4.4% 7.9% -1.7% 1.7%
Imports 3.6% 6.7% 3.6% 0.5% 4.4%
Nominal GDP 0.1% 1.8% 1.6% 1.3% 1.7%
GDP Deflator -0.9% -0.3% 2.5% 0.7% 0.7%
FY15E FY16EFY12 FY13 FY14
510
515
520
525
530
535
540
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
13 14 15 16
(Yen trillion) GDP
4
GDP is likely to stay under pressure from sluggish external demand for a while. Policy measures
taken in China and their effectiveness hold a key.
Fiscal and monetary measures can be expected in Japan early next year, which should lift
Japanese economy to be back on a recovery path again.
SMAM quarterly GDP forecast for FY15-16
(Source) Cabinet Office, forecast by SMAM
Q
SMAM forecast
Deteriorating exports to China and other Asian countries are causing negative effects
Continuing slowdown in Chinese economy is spilling over to other Asian countries, which is causing negative
growth in exports from Japan. Declining exports lead to lower industrial production and causes a concern for
the private capital investment.
5
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
10 11 12 13 14 15
China
Asia excl. China
U.S.
EU
Others
Total Exports
Total Exports and contribution by destinations (QoQ%)(QoQ %)
(Source) Ministry of Finance and Bank of Japan, compiled by SMAM
Note: Data for 3Q2015 is the average of monthly data already announced.
Negative impact of China’s slowdown on Industrial Production has been larger than expected
6
Recently released Industrial Production (IP) data were worse than previously forecast. SMAM revised forecast
for 3Q2015 from previous -0.3% to -1.5% (QoQ % change).
Due to continuing slowdown in China, recovery in IP from 4Q2015 is currently estimated as moderate.
70
75
80
85
90
95
100
105
110
115
120
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
SMAM's forecast for Industrial Production
SMAM Forecast
(Source) Ministry of Economy, Trade and Industry, Forecast by SMAM
Note: Shaded period means recession.
(2010=100)
7
Private Consumption is recovering from a temporal dip in Apr-Jun quarter
Private Consumption is recovering in July-Sep quarter from the dip in the quarter before, for which miserable
weather and rising prices for essential items were partly blamed.
-10%
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
10 11 12 13 14 15
Private Consumption Integrated Estimates
Household Survey (Consumption)
Retail Sales (inflation adjusted)
GDP Private Consumption
(Source) Cabinet Office, Ministry of Economy, Trade and Industry
Various Statistics for Private Consumption(QoQ %)
Note: Data for 3Q2015 is the average of monthly data already announced.
8
Increase in regular wage has been positive for consumers
Regular wage payment has been increasing YOY since January 2015, which has been positive for consumers.
Whether this increasing trend in wage can be sustained in and after FY2016 is quite important for the Japanese
economy, and underlying strength in corporate earnings requires close attention.
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8
12 13 14 15
Overtime etc
Bonus
Regular wage
Tot cash wage paymentYOY%
Cash wage payment and contribution by components(YOY %)
(Source) Ministry of Health, Labor and Welfare
Outlook for Japanese Stock Markets
9
Stock market outlook: The stock market is waiting for further stimulus measures
SMAM short-term view
Risk-off mode has moderated somehow, which made global markets to rebound lately. The Japanese stock
market will be in a range bound move for the short term until expected fiscal and monetary measures are
brought in early next year though downside risk seems limited with low valuation for the stock market.
Longer-term outlook (6-months and beyond) Chinese economy is expected to gradually stabilize as policy measures buildup further and start to take effect. Atmosphere around the stock market would get brighter as fiscal measures and additional monetary stimulus
are expected in early next year and further economic policies and initiatives can be announced running up to the upper house election expected in July 2016.
Note: SMAM’s Projection is as of October 21st 2015 and subject to updates without notice
10
700
900
1,100
1,300
1,500
1,700
1,900
Ju
l-1
2
Au
g-1
2
Se
p-1
2O
ct-
12
No
v-1
2D
ec-1
2
Ja
n-1
3
Fe
b-1
3M
ar-
13
Ap
r-1
3M
ay-1
3
Ju
n-1
3Ju
l-1
3
Au
g-1
3
Se
p-1
3O
ct-
13
No
v-1
3D
ec-1
3
Ja
n-1
4
Fe
b-1
4M
ar-
14
Ap
r-1
4M
ay-1
4
Ju
n-1
4Ju
l-1
4
Au
g-1
4
Se
p-1
4O
ct-
14
No
v-1
4D
ec-1
4
Ja
n-1
5
Fe
b-1
5M
ar-
15
Ap
r-1
5M
ay-1
5
Ju
n-1
5Ju
l-1
5
Au
g-1
5
Se
p-1
5O
ct-
15
No
v-1
5D
ec-1
5
Ja
n-1
6
Fe
b-1
6M
ar-
16
Ap
r-1
6M
ay-1
6
Ju
n-1
6Ju
l-1
6
Au
g-1
6
Se
p-1
6O
ct-
16
No
v-1
6D
ec-1
6
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 economic recovery to be sustained led by strong US economy
• Japan’s private consumption to grow though mildly supported by higher real wages growth
• Growing expectation for positive corporate earnings revisions due to weaker JPY
• Reflationary policy to be continued toward the next consumption tax hike
Upside Risks include:
• Stronger-than-expected global growth
• Stronger-than-expected measures by Abe government
Downside Risks include:
• Unexpectedly large impact from the process of US monetary policy normalization
• Concern over emerging economies including China
• Increasing geopolitical concerns
11
12
Corporate earnings are expected to keep growing despite increasing pressure on top-line sales. Lower
costs such as energy and materials have been supportive so far.
Some caution is required as analysts are revising earnings forecasts more often downward than
upward recently.
Earnings growth is expected to continue for Japan with a caution for down-revisions
(10)
10
30
50
70
90
110
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2003/12 2005/06 2006/12 2008/06 2009/12 2011/06 2012/12 2014/06 2015/12 2017/06
EP
S(Y
en
)
TO
PIX
TOPIX and EPS
Source : Bloomberg, DataStream
IBES Consensus EPS
TOPIX
12M FWD EPS
18M FWD EPS
Historical EPSConsensus Estimate
As of Sep. 2015
-40%
-30%
-20%
-10%
+0%
+10%
+20%
+30%
2011 2012 2013 2014 2015
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 Oct. 15th
8.0
10.0
12.0
14.0
16.0
18.0
20.0
PER of MSCI country indices
Date period from Jan.2012 to Sep.2015
PER has fallen globally and relative attractiveness for Japan still holds
PER has fallen globally on decelerating economic growth and concern for further deterioration.
If these concerns can be lightened by policy measures by governments and some evidence of stabilizing
economies, PER could be lifted again.
Better fundamentals in Japan, such as faster earnings growth and improving corporate governance should be
favorable for Japanese equities.
13
USA 8.0%
Europe 6.6%
Japan 11.7%As of 15-Oct-2015
12Month EPS
Growth forecast
15.6 US
13.8 Europe
12.9 Japan
Note: PER is based on 12 month forward EPS forecast as of the end of each month.
(Source) MSCI , IBES , FactSet
PER for Japanese stock market seems attractive in historical comparison
Since Abenomics started, PER for Japanese stock market, in TOPIX index, has been in a range between 13x
and 16x.
Current PER below 14x is in a lower side of this range and downside for the stock market seems limited.
14
300
500
700
900
1,100
1,300
1,500
1,700
1,900
Jan
-07
Ma
r-07
Ma
y-0
7
Jul-0
7
Se
p-0
7
Nov-0
7
Jan
-08
Ma
r-08
Ma
y-0
8
Jul-0
8
Se
p-0
8
Nov-0
8
Jan
-09
Ma
r-09
Ma
y-0
9
Jul-0
9
Se
p-0
9
Nov-0
9
Jan
-10
Ma
r-10
Ma
y-1
0
Jul-1
0
Se
p-1
0
Nov-1
0
Jan
-11
Ma
r-11
Ma
y-1
1
Jul-1
1
Se
p-1
1
Nov-1
1
Jan
-12
Ma
r-12
Ma
y-1
2
Jul-1
2
Se
p-1
2
Nov-1
2
Jan
-13
Ma
r-13
Ma
y-1
3
Jul-1
3
Se
p-1
3
Nov-1
3
Jan
-14
Ma
r-14
Ma
y-1
4
Jul-1
4
Se
p-1
4
Nov-1
4
Jan
-15
Ma
r-15
Ma
y-1
5
Jul-1
5
Se
p-1
5
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 October 15th 2015
TOPIX and PER based on 12-month forward EPS
16x
12x
13x
14x
15xPM Abe's 2nd term started
Supply-Demand balance: Foreign investors’ risk-off seems receding
Between August 10th and October 2nd, foreign investors sold as much as 7 trillion yens in Japanese stock
markets when trades of individual stock and futures are combined. For the week between October 5th and 9th
they bought back some and selling pressure has receded.
Japan Post is going to be listed on the stock exchange on November 4th, for which good appetite from
individual investors is expected on high dividend yield and low PBR.
15
0
5,000
10,000
15,000
20,000
0
100
200
300
400
500
600
700
2010 2011 2012 2013 2014 2015
Foreign Investor Net-Buys & Nikkei 225
Foreigners' net buy accumlated (LHS)
Nikkei 225 end week(RHS)
Notes: Calendar year, weekly. Foreign investors' net purchase of TSE listed stocksSource: Tokyo Stock Exchage, SMAM
(JPY)(JPY '00bn)
Up to Oct 16th
16
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
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