Japanese Equities

Equity | September 26, 2017

Ed Ritchie, Managing Director and Lead Advisor for Manulife Asset Management’s Japanese Equity Strategies

Global Intelligence Autumn 2017 - Japanese Equities: The Backdrop Icon

THE BACKDROP

Although there were some upward revisions to earnings, we should expect more in the second half.

Earnings reports for the first quarter are now in and we have seen a number of companies announcing upward revisions for the year. Net income for the quarter was up 33% year-on-year, which was 20% ahead of consensus. According to SMBC Nikko, 68% of companies reported positive surprises in the first quarter, which is the highest ratio since FY 2005.1

Although there were some upward revisions to earnings, we should expect significantly more in the second half. Most of the upward revisions were driven by the auto sector, which had initially published conservative earnings forecasts on the back of Yen strength. Now that the Yen has remained below 110 to the Dollar, they’ve felt it necessary to revise their earnings. There have also been some upward revisions from export-related companies and from IT service stocks among the domestic sectors.

Earnings Revisions for Fiscal Year 2018

FY3/18 to fiscal year 2018
Source: CLSA, Bloomberg, as of August 4, 2017

Given the background of strong domestic GDP growth (4% annualized real quarter-on-quarter GDP growth in Q2)2, improving global trade and a stable currency, we believe it is highly likely that by the end of the year there will be enough momentum to result in at least a 10% aggregate upward earnings revision.

Global Intelligence Autumn 2017 - Japanese Equities: The Opportunities For Investors Icon

OPPORTUNITIES FOR INVESTORS

We continue to see a pick-up in domestic consumer confidence, which combined with rising spend from tourism, should lead to growth in domestic spending.

A common complaint about the Japanese labour market is that while employment is growing, much of the job creation is in part-time roles and therefore lowly paid. Yet data suggests this is no longer the case. According to the latest data, full time employment has grown faster than part time employment in the Abenomics era.

These figures fail to tell the whole story however, for while full-time wages have remained relatively flat, hourly wages for part-time employees have been rising rather sharply.

These two factors combined should lead to rising wages. However, wage growth has remained relatively stagnant. This can be explained by an increasing number of retirees staying in the workforce on lower wages. Overall, however, wages are on the rise particularly for part-time workers and new recruits and this should lead to a rise in spending over time.

We continue to see a pick-up in domestic consumer confidence, which combined with rising spend from tourism, should lead to growth in domestic spending. It has been less pronounced so far in the retail sector where there is ongoing price competition, but there has been very strong demand in areas such as cosmetics, particularly for high end products. We expect consumer confidence to improve further as the wage growth data improves.

Another indicator of the improving domestic economy is loan growth, which continues to pick up, particularly among mega banks. Much of this is being spent on private capex and housing. This should be a boon for the banking sector. However, without higher interest rates, it is hard for banks to grow their net interest margin. Indeed, the ongoing increase in deposits continues to put competitive pressure on the loan spread.

As mentioned previously, the auto sector is an interesting one. There has been concern about residual values of passenger cars in the US might be starting to dip and the knock-on effect that could have on financial services providers operating in the auto space, which would mean fewer cars sold in America. However, their results are indicating that demand is not wholly reliant on the US market. There is demand from the domestic market, which there hasn’t been for years and we put this down to increasing consumer confidence, and also from emerging markets – particularly South-East Asia and South America.

There is continued demand for semiconductor capital (semi-cap) equipment, particularly in China for new DRAM (Dynamic Random Access Memory) factories. The semi-cap industry is notoriously cyclical however, due to the industry's tendency to increase capacity at the peak.

Global Intelligence Autumn 2017 - Japanese Equities: The Risks Icon

RISKS

We regard the escalating tension between the US and North Korea as the biggest risk facing the region.

We regard the escalating tension between the US and North Korea as the biggest risk facing the region. While the likelihood of entering a nuclear tit-for-tat is likely to be incredibly small, the last year or so has taught us that unlikely outcomes can and do occur.

Global Intelligence Autumn 2017 - Japanese Equities: The On Our Radar Icon

ON OUR RADAR

It’s increasingly likely that the US Federal Reserve and the European Central Bank will soon begin to unwind their balance sheets, but we don’t expect the Bank of Japan to make any significant changes before next April.

It is increasingly likely that the European Central Bank will soon follow the US Federal Reserve's lead and begin to unwind its balance sheets. But we do not expect the Bank of Japan to make any significant changes before next April, when the post of Governor is up for renewal. There is talk of Haruhiko Kuroda receiving an unprecedented second term and that decision will decide the future trajectory of the BoJ, but until that decision is made we expect it to be business as usual.

Prime Minister Shinzo Abe has decided to call a snap general election one year before the end of the government's four-year term. With support for Mr. Abe’s Liberal Democratic Party (LDP) at mid-40-percent and the opposition DPJ (Democratic Party of Japan) in the high teens, this should be a strong win for Mr. Abe and his party.3 It is unlikely that we will see a reversal of popularity in the same way that we saw in the UK earlier this year. In our view, this election is set to cement Mr. Abe's prime ministership in the run-up to the Tokyo Olympics in 2020 and give the LDP enough time to reverse the impact of the upcoming October 2019 consumption tax hike (from 8% to 10%) before the next election.4

1 SMBC Nikko Securities, as of July 25, 2017.
2 CNBC: Japan Q2 GDP Blows Past Expectations on Robust Domestic Demand, August 13, 2017.
3 Nikkei Asian Review: Japan’s Ruling Party Far Ahead Of Opposition As Election Nears, September 25, 2017.
4 BBC: Japan Delays Sales Tax Rise To 2019, June 1, 2016.
Investment Considerations
Individual portfolio management teams may have different views and opinions that are subject to change without notice.
Investing involves risk, and there is always the potential of losing money when you invest in securities. It is important that you consider this information in the context of your personal risk tolerance and investment goals. Before acting on the information provided, you should consider suitability for your circumstances and, if necessary, seek professional advice. Diversification or asset allocation does not guarantee a profit nor protect against loss in any market.
Global events have resulted, and may continue to result, in an unusually high degree of volatility in the financial markets, both domestic and foreign.
Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a fund’s investments.
Investments in foreign securities involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments made in emerging markets.
Important Information
Individual portfolio management teams may have different views and opinions that are subject to change without notice. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit nor protect against loss in any market.
© 2017 Manulife Asset Management. All rights reserved. Manulife Asset Management, Manulife and the block design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.
This confidential document is for the exclusive use of the intended institutional investor or their agents and may not be transmitted, reproduced or used in whole or in part for any other purpose, nor may it be disclosed or made available, directly or indirectly, in whole or in part, to any other person without our prior written consent.
Manulife Asset Management is the asset management arm of Manulife, a global organization that operates in many different jurisdictions worldwide. Manulife Asset Management’s diversified group of companies and affiliates provide comprehensive asset management solutions for institutional investors, investment funds and individuals in key markets around the world. Manulife Asset Management has investment offices in the United States, Canada, the United Kingdom, Japan, Hong Kong, and throughout Asia. Any private asset management activities described herein are conducted by various entities within the Manulife group of companies, including regulated insurance companies, investment advisors and other entities in the US, Canada and other jurisdictions. Capabilities may be aggregated across entities for illustrative purposes.
These materials have not been reviewed by, are not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Asset Management may be found at www.manulifeam.com.
Canada: Manulife Asset Management Limited, Manulife Asset Management Investments Inc., Manulife Asset Management (North America) Limited and Manulife Asset Management Private Markets (Canada) Corp. Australia, South Korea and Hong Kong: Manulife Asset Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajmen Indonesia. Japan: Manulife Asset Management (Japan) Limited. Malaysia: Manulife Asset Management Services Berhad. Thailand: Manulife Asset Management (Thailand) Company Limited. Singapore: Manulife Asset Management (Singapore) Pte. Ltd. Taiwan: Manulife Asset Management (Taiwan) Co. Ltd. United Kingdom and European Economic Area: Manulife Asset Management (Europe) Limited which is authorised and regulated by the Financial Conduct Authority. United States: Manulife Asset Management (US) LLC, Hancock Capital Investment Management, LLC and Hancock Natural Resource Group, Inc. Vietnam: Manulife Asset Management (Vietnam) Company Ltd.
No Manulife entity makes any representation that the contents of this presentation are appropriate for use in all locations, or that the transactions, securities, products, instruments or services discussed in this presentation are available or appropriate for sale or use in all jurisdictions or countries, or by all investors or counterparties. All recipients of this presentation are responsible for compliance with applicable laws and regulations.
Any general discussions or opinions contained within this document regarding securities or market conditions represent the view of either the source cited or Manulife Asset Management as of the day of writing and are subject to change. There can be no assurance that actual outcomes will match the assumptions or that actual returns will match any expected returns. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable but Manulife Asset Management does not make any representation as to their accuracy, correctness, usefulness or completeness and does not accept liability for any loss arising from the use hereof or the information and/or analysis contained herein. Information about the portfolio’s holdings, asset allocation, or country diversification is historical and will be subject to future change. Neither Manulife Asset Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein.
The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline or other expectations, and is only as current as of the date indicated. The information in this material including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. This material was prepared solely for informational purposes and does not constitute, and is not intended to constitute, a recommendation, professional advice, an offer, solicitation or an invitation by or on behalf of Manulife Asset Management to any person to buy or sell any security or to adopt any investment strategy, and shall not form the basis of, nor may it accompany nor form part of, any right or contract to buy or sell any security or to adopt any investment strategy. Nothing in this material constitutes investment, legal, accounting, tax or other advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. Prospective investors should take appropriate professional advice before making any investment decision. In all cases where historical performance is presented, note that past performance is not indicative of future results and you should not rely upon it as the basis for making an investment decision.
The distribution of the information contained in this presentation may be restricted by law and persons who access it are required to comply with any such restrictions. The contents of this presentation are not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to any applicable laws or regulations. By accepting this material you confirm that you are aware of the laws in your own jurisdiction relating to the provision and sale of the funds, portfolios or other investments discussed in this presentation and you warrant and represent that you will not pass on or utilize the information contained in the presentation in a manner that could constitute a breach of such laws by any Manulife entity or any other person.
Australia: Manulife Asset Management (HK) Limited ("Manulife AM (HK)") is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of the financial services being offered in this material. Manulife AM (HK) is regulated by the Securities and Futures Commission of Hong Kong ("SFC") under Hong Kong laws, which differ from Australian laws. This presentation is directed at wholesale investors only.
China: No invitation to offer, or offer for, or sale of any security will be made to the public in China (which, for such purposes, does not include the Hong Kong or Macau Special Administrative Regions or Taiwan) or by any means that would be deemed public under the laws of China. The offering document of the subject fund(s) has not been submitted to or approved by the China Securities Regulatory Commission or other relevant governmental authorities in China. Securities may only be offered or sold to Chinese investors that are authorized to buy and sell securities denominated in foreign exchange. Prospective investors resident in China are responsible for obtaining all relevant approvals from the Chinese government authorities, including but not limited to the State Administration of Foreign Exchange, before purchasing an interest in the subject fund(s).
Hong Kong: This material is provided to Professional Investors [as defined in the Hong Kong Securities and Futures Ordinance and the Securities and Futures (Professional Investor) Rules] in Hong Kong only. It is not intended for and should not be distributed to, or relied upon, by members of the public or retail investors. Neither Manulife AM Hong Kong nor any of its employees are licensed to deal as an estate agent with any property situated in Hong Kong.
Malaysia: This material was prepared solely for information purposes and is not an offer or solicitation by anyone in any jurisdictions or to any person to whom it is unlawful to make such an offer or solicitation.
Singapore: This material is intended for Accredited Investors and Institutional Investors as defined in the Securities and Futures Act.
South Korea: This material is intended for Qualified Professional Investors under the Financial Investment Services and Capital Market Act ("FSCMA"). Manulife Asset Management does not make any representation with respect to the eligibility of any recipient of these materials to acquire any interest in any security under the laws of Korea, including, without limitation, the Foreign Exchange Transaction Act and Regulations thereunder. An interest may not be offered, sold or delivered directly or indirectly, or offered, sold or delivered to any person for re-offering or resale, directly or indirectly, in Korea or to any resident of Korea, except in compliance with the FSCMA and any other applicable laws and regulations. The term “resident of Korea” means any natural person having his place of domicile or residence in Korea, or any corporation or other entity organized under the laws of Korea or having its main office in Korea.
Switzerland: This presentation may be made available only to Qualified Investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006 (as amended).
United Kingdom and European Economic Area: The data and information presented is directed solely at persons who are Professional Investors in accordance with the Markets in Financial Instruments Directive (2004/39/EC) as transposed into the relevant jurisdiction. Further, the information and data presented does not constitute, and is not intended to constitute, "marketing" as defined in the Alternative Investment Fund Managers Directive.
United States: Manulife Asset Management (US) LLC (“MAM US”) and Manulife Asset Management (North America) Limited (“MAM NA”) are indirect wholly owned subsidiaries of Manulife. They may provide advisory services, and may market such services, under the brand name “John Hancock Asset Management,” and MAM US may also use “Sovereign Asset Management.” These brand names may, as applicable, be described as “a division of” MAM US or MAM NA, but are not separate legal entities. This material is not intended to be, nor shall it be interpreted or construed as, a recommendation or providing advice, impartial or otherwise. MAM US, MAM NA, Hancock Capital Investment Management, LLC, and Hancock Natural Resource Group, Inc. and their representatives and/or affiliates may receive compensation derived from the sale of and/or from any investment made in its products and services.
Notice to Investors
ARGENTINA
The information contained in this presentation is not directed to any investor in Argentina where the provision of this information would constitute a public offering of advisory/investment services or is prohibited in Argentina by any applicable law or regulation.
BRAZIL
Manulife Asset Management (Manulife AM) is not accredited with the Brazilian Securities Commission (CVM) to perform management services. The management services may not be publicly offered or sold to the public in Brazil. Documents relating to the management services as well as the information contained therein may not be supplied to the public in Brazil.
CHILE
Manulife Asset Management is not registered or licensed in Chile to provide managed account services and is not subject to the supervision of the Superintendencia de Valores y Seguros of Chile. The managed account services may not be publicly offered or sold to the public in Chile.
COLOMBIA
This presentation does not have the purpose or the effect of initiating, directly or indirectly, the purchase of a product or the rendering of a service by Manulife Asset Management (Manulife AM) to Colombian residents. Manulife AM's products and/or services may not be promoted or marketed in Colombia or to Colombian residents unless such promotion and marketing is made in compliance with Decree 2555 of 2010 and other applicable rules and regulations related to the promotion of foreign financial and/or securities related products or services in Colombia. Neither Manulife AM nor any related person or entity has received authorization or licensing from the Financial Superintendency of Colombia or any other governmental authority in Colombia to market or sell the managed account services within Colombia.
MEXICO
This communication and any accompanying information (the “Materials”) are intended solely for informational purposes and do not constitute (and should not be interpreted to constitute) the offering, selling, or conducting of business with respect to investment management services in Mexico, or the conducting of any brokerage, banking or other similarly regulated activities (“Financial Activities”) in Mexico. Neither Manulife Asset Management (Manulife AM), nor the products and services described herein, are licensed, registered or authorized in Mexico. Furthermore, neither Manulife AM, nor the products and services described herein, are regulated or supervised by any governmental or similar authority in Mexico. The Materials are private, confidential and are sent by Manulife AM only for the exclusive use of the addressee. The Materials must not be publicly distributed and any use of the Materials by anyone other than the addressee is not authorized. The addressee is required to comply with all applicable laws in Mexico, including, without limitation, tax laws and exchange control regulations, if any.
PERU
This communication and any accompanying information (the “Materials”) are intended solely for informational purposes and do not constitute and should not be interpreted to constitute the offering, selling, or conducting of business with respect to investment management services in Peru, or the conducting of any brokerage, banking or other similarly regulated activities (“Financial Activities”) in Peru. Neither Manulife Asset Management (Manulife AM), nor the products and services described herein, are licensed, registered or authorized in Peru. Furthermore, neither Manulife AM, nor the products and services described herein, are regulated or supervised by any governmental or similar authority in Peru. The Materials are private, confidential and are sent by Manulife AM only for the exclusive use of the addressee. The Materials must not be publicly distributed and any use of the Materials by anyone other than the addressee is not authorized. The addressee is required to comply with all applicable laws in Peru, including, without limitation, tax laws and exchange control regulations, if any.
401520
 

About the Author

The opinions expressed are those of Manulife Asset Management™ at the time of publication, and are subject to change based on market and other conditions. The information in this article including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Asset Management disclaims any responsibility to update such information. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife Financial, Manulife Asset Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. Past performance does not guarantee future results. This material was prepared solely for informational purposes, does not constitute an offer or an invitation by or on behalf of Manulife Asset Management to any person to buy or sell any security and is no indication of trading intent in any fund or account managed by Manulife Asset Management.

21474836727
Equity