(This piece originally appeared in Opalesque's AMB)
The latest surge from the Japanese stockmarket reveals its sixth consecutive month of gains in February, with a 3.8% return over the month. Masashi Oda, Chief Investment Officer, SuMi TRUST commented:‚ "A key positive driver was the nomination of Mr Haruhiko Kuroda, currently the President of the Asian Development Bank and former Vice Minister of Finance for International Affairs, to be the next Governor of the Bank of Japan. This followed the decision in the early part of the month of the present Governor, Mr Masaaki Shirakawa, to step down before the scheduled end of his five-year term. Prime Minister Abe has called on the BOJ to ease policy and boost stimulus measures to revive the economy. Mr Kuroda is seen as a strong supporter of such measures, having advocated that the BOJ should adopt an inflation target and pursue a policy of aggressive monetary easing in order to attempt to reverse many years of deflation."
Oda also believes that another key positive driver, which has been seen by investors as further evidence of Prime Minister Abe's strong commitment to boosting economic growth, stems from his meeting with President Obama at which an agreement was reached on talks which could set the stage for Japan to join negotiations on the Trans-Pacific Partnership, a U.S.-led regional free trade agreement. Abe had undertaken to consider joining the pact only if no prior commitment to eliminate all tariffs was required, and now that the official joint statement made it clear that all goods will be subject to negotiation, an announcement that Japan will enter negotiations is expected shortly.
"Investors were also reassured that communiquƒ©s from G7 and G20 did not criticise Japan over the recent weakness of the yen, effectively signalling that the BOJ has scope to continue stimulating the stagnant economy. Prior to the meeting there had been concerns that criticism from G20 could prompt Japan to modify its aggressive stance and hurt plans to spur growth. Instead, finance ministers from the member countries pledged that fiscal and monetary policies will not "target exchange rates for competitive purposes", reducing the risk of reversing the recent depreciation of the yen" Oda writes.
"SuMi TRUST believes that the strength and duration of a further stock market rally depends, in the near term, on a number of key factors. Firstly, whether the global economy maintains its positive momentum, secondly, the extent to which the new BOJ Governor implements policy measures and thirdly whether Japanese companies deliver the strong earnings growth expected by investors. In the medium term, the decision to commence negotiations on joining the Trans-Pacific Partnership and recognition of the potential benefits of joining the pact is an additional factor that could provide support for the market."
While large cap stocks have led the recent rally, outperforming the broader market, and still present a range of strong ideas, SuMi TRUST has also sought out opportunities in small and mid-cap stocks, many of which have been lagging the market. Oda writes: "One stock pick in small cap companies is Nippon Seiki, a manufacturer of instrument panels and sensors for vehicles and a world leader for its products in the two-wheel sector. As a 'Keiretsu' supplier, the company has a strong relationship with Honda, but the firm has been expanding its business with other vehicle manufacturers and this now represents 65% of instrument panel sales and 74% of total sales. On the back of the competitiveness and quality of its products, SuMi TRUST believes that Nippon Seiki is likely to capture significant business from a major non-Japanese auto manufacturer. We expect the company to achieve strong earnings growth over the medium-term on higher sales resulting from market share growth and higher levels of production by Honda, which is supported by a recovery of auto sales in the U.S. and continued sales growth in emerging countries."
SuMi TRUST's Global Asset Services division has global expansion plans, reported in Asia Pacific Intelligence's March edition. You can read that piece here.
Asia Pacific Intelligence interviewed Japanese hedge fund manager Chris Rigg of the Audley Japan Opportunities Fund in February. You can read that piece here.
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.