Japanese Stock Market Outlook - SMAM monthly comments & views - March 2015
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Japanese Stock Market Outlook SMAM monthly comments & views - March 2015 -
Executive summary
Japanese Economy
Ongoing moderate economic recovery is currently in the middle stage, as robust Exports and Industrial
Production is boosting the economy. The other economic growth driver, Consumption Expenditures falters with
mixed economic data for solid recovery. Wage increase should help to gain Consumption and consumer
confidence, while “Spring wage negotiation round” is in full swing.
• SMAM expects mild real GDP recovery of +1.2% and +1.6% in FY2015 and FY2016 alongside global economic
growth.
• Current recovery polarizes upbeat Exports and Industrial Production, and lagging Consumption.
• Core-CPI is expected to fall to “zero” in May and BOJ is likely to revise its target rate downward, but the timing
of additional monetary easing is controversial.
Japanese Stock Markets
The market is expected to rally on increasingly positive earnings growth as quite a few up-revisions are
expected due to weaker JPY at the full-year corporate performance posting in May.
• Corporate earnings growth momentum is likely to accelerate as double digit profit growth is expected in FY2015
(FY2016/3).
• Downside risk is associated with foreign factors such as geopolitical concerns, unclear monetary policy by Fed
and ECB, and possibly negative effects by crude oil price slump.
1Outlook for Japanese Economy
2SMAM economic outlook for FY14-16
SMAM newly rated Real GDP forecast of +1.6% for FY2016, while the forecasts were downgraded to -0.8%
from -0.6% for FY2014 and to +1.2% from +1.3% for FY2015 respectively.
Recently released annualized +2.2% October-December GDP data showed mild recovery. Strong Exports
spurred to expand Industrial Production, while weak Consumption weighed on the slower-than-expected GDP
growth (market consensus of +3.7%) in the quarter.
The BOJ is highly likely to revise downward its +1.0% inflation forecast for FY2015 as SMAM expects Core-
CPI to dip into negative once in May and recover slightly to +0.4% for full FY2015.
FY11 FY12 FY13 FY14E FY15E FY16E
Real GDP growth 0.4% 1.0% 2.1% -0.8% 1.2% 1.6%
Private Consumption Expenditure 1.4% 1.8% 2.5% -3.1% 1.2% 1.7%
Private Housing Investment 3.2% 5.7% 9.3% -11.9% 0.3% 4.2%
Private Capital Investment 4.8% 1.2% 4.0% 0.1% 2.5% 3.2%
Public Consumption Expenditure 1.2% 1.5% 1.6% 0.3% 0.8% 0.6%
Public Capital Investment -3.2% 1.0% 10.3% 2.9% -1.7% -1.6%
Net Exports (contrib. to GDP growth) -1.0% -0.8% -0.5% 0.7% 0.3% 0.1%
Exports -1.6% -1.3% 4.7% 7.2% 5.0% 5.0%
Imports 5.4% 3.6% 6.7% 3.0% 4.0% 5.2%
Nominal GDP -1.3% 0.1% 1.8% 1.2% 1.3% 2.2%
GDP Deflator -1.7% -0.9% -0.3% 2.1% 0.1% 0.5%
FY staring April and ending March
(%, YoY except Net Exports)
Notes: E=SMAM forecasts. SMAM views are as at 16 February 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
3Quarterly GDP: +2.2% GDP growth after 2 straight quarters slowdown
October-December GDP grew annualized +2.2%, bottoming out after 2 consecutive quarters slowdown.
Industrial Production has geared up again since October-December quarter, spurred by upbeat Exports, while
Consumption Expenditures are still improving at slower pace.
(QoQ % annualized) Real GDP growth and Contribution by components
15
10 Forecast by SMAM
"Others" consists of
mostly Inventory change.
5
0
-5
Bottom Out
Private Consumption Expenditure
Private Housing Investment
-10 Private capital Investment
Public Capital Investment
Others (mostly inventory change)
-15 Net Exports
Real GDP growth
-20
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
12 13 14 15 16 17
(Source) Cabinet Office, SMAM forecast
4Recovery Process: Exports⇒Production ⇒ (Employment, Confidence) ⇒ Consumption
SMAM forecasts this recovery process in order from Exports to Production and Consumption. Now it is the
middle stage of Production expansion.
Stable economic recovery is expected at this time underpinned by robust Exports and Industrial Production
due to US led global economic growth.
Lagging Consumption Expenditures should be buoyed by improvement in Consumer Confidence.
(YR2010=100)
Exports, Industrial Production and Consumer Expenditure Forecast by SMAM
110
108
106
104
102
100
98
96
94
Exports
92 Industrial Production
Consumption Expenditure
90
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
12 13 14 15
(Source) Ministry of Economy, Trade and Industry, BOJ, Cabinet Office, SMAM seasonally adjusted
*1: Exports for 1Q 2015 are estimated based on the data of first 20 days January provisional basis.
*2: Industrial Production for 1Q 2015 is estimated based on the data of Industrial Production Forecast Index.
5Exports: Favorably growing Exports in January
October-December Export volume accelerated to expand to +2.7% QoQ from +1.6% QoQ in July-September.
Exports FOB value basis favorably rose by 14.8% in January (First 20 days Provisional).
(Cha nge, %)
Export Volume (YR2010=100)
（Export Volume Index ）
8.0% 110
6.0%
105
4.0%
100
2.0%
0.0%
95
Forecast by SMAM
-2.0%
90
QoQ Change (LHS)
-4.0%
Export Volume month (RHS)
Export Volume 3mMA (RHS)
-6.0% 85
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
12 13 14 15
(Source) Bank of Japan, SMAM seasonally adjusted
* QoQ Change and Export Volume 3mMA for January -March quarter 2015 are estimated based on the data of first 20 days January
6Production: Mild sustainable IP recovery to be expected
October-December Industrial Production recovered by +1.8% QoQ for the first time in 3 quarters.
Production Forecast Index shows robust growth of +6.3% MoM in January and -1.8% MoM in February.
(YR2010=100)
（IP Index）
Industry Production （IP 3mMA QoQ Change, % ）
130 30
120
20
110
10
100
90 0
80
-10
70
-20
60
IP 3mMA QoQ change (RHS)
IP Index (LHS)
50 -30
1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1
05 06 07 08 09 10 11 12 13 14 15
(Source) Ministry of Economy, Trade and Industry, SMAM seasonally adjusted (Upto February 2015)
* IP 3mMA QoQ for January -March quarter 2015 is estimated based on the data of IP Index in January and february 2015
7Consumer Confidence: Slight improvement in Consumer Sentiment
Consumer Confidence Index rebounded for 2 consecutive months by +1.1% MoM in December and +0.3%
MoM in January.
Consumer Sentiment is anticipated to improve, supported by tight labor market. December unemployment rate
fell to 3.4% of the full-employment.
Slower growth in real wages weighs on recovery in Consumption as Scheduled cash earnings (fixed salary) has
not grown much from the previous year. Considerable wage hike is the key for improving consumer confidence.
(Yen) Consumer Confidence Index and NIkkei 225
20,000 60
18,000
50
16,000
14,000
40
12,000
10,000 30
8,000
20
6,000
4,000
Nikkei 225 (LHS) 10
Consumer Confidence Index (RHS)
2,000
0 0
4 6 8 1012 2 4 6 8 1012 2 4 6 8 1012 2 4 6 8 1012 2 4 6 8 1012 2 4 6 8 1012 2 4 6 8 1012 2 4 6 8 1012 2 4 6 8 1012 2 4 6 8 1012 2 4 6 8 1012
05 06 07 08 09 10 11 12 13 14 15
(Source) Cabinet Office, INDB, Tokyo Stock Exchange (Upto January 2015)
8Consumption: Mixed Consumption data showing weak recovery
December Retail Sales slightly rose by +0.2% YoY, while Consumer Expenditures lost by 3.4% YoY in
December.
Consumption tax hike seems to affect more on Consumer Discretionary. December New car sales slumped by
-18.9% YoY.
Mixed Consumption data shows Consumption seems to be still in the middle of full-recovery.
(%, YoY) Consumption Expenditures and Retail Sales
15
Consumption Tax Hike
10
5
0
-5
Consumption Expenditures
Retail Sales
-10
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
2013 2014
(Source) Ministry of Internal Affairs and Communications
9Outlook for Japanese Stock Markets
10Stock market outlook: Earnings growth prospects should lift up the stock market
SMAM short-term view
Due to lack of major concern over domestic factors, Japanese equity market is anticipated to sustain to rally.
SMAM forecasts positive corporate earnings prospects due to weaker JPY.
Downside risk includes foreign factors such as geopolitical concerns over Greek negotiation and
Russia/Ukraine cease-fire, uncertain monetary policy in Fed and ECB, and possibly negative effects to global
economy and capital market led by crude oil price plunge.
Longer-term outlook (6-month and beyond)
For longer-term, we continue to expect the market to track on a modest uptrend, underpinned by US-led
moderate global growth, solid corporate earnings growth and strengthened reflationary policies in Japan.
(Points) TOPIX index range expectation by SMAM's Projection
1,700
1,500
1,300
1,100
900
Topix
700 Upside Range
Downside Range
500
Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16
(Source) TOPIX: Tokyo stock exchange, Upside and Downside range: forecasted by SMAM
Note: SMAM’s Projection is as at 18 February 2015 and subject to updates without notice
11Base 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 mild recovery from tax-hit weak demand buoyed by rescheduled next tax hike until 2017
• 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:
• Slowdown in global economy
• Concern over global deflation
• Increasing geopolitical concerns
12Global recovery: Global PMI Vs. TOPIX
PMI is often used as a leading economic indicator. There seems some correlation between TOPIX and Global
PMI as many Japanese companies increase their profits while global economy are growing.
Recent sharp improvement in Global PMI would help to lift up the Japanese equity market index although
corporate profits are often lagging to grow from the economic data.
GLOBAL PMI and TOPIX (3month Chg, %)
4.0 30%
3.0
20%
2.0
10%
1.0
0.0 0%
-1.0
-10%
-2.0
Global PMI (LHS) -20%
-3.0 TOPIX (RHS)
-4.0 -30%
May-12 Nov-12 May-13 Nov-13 May-14 Nov-14
(Source) Thomson Reuters Upto 31th January 2015
13EPS forecasts: Upbeat EPS forecasts
IBES consensus EPS continues rising supported by solid growth prospects. IBES 12 month forward EPS and
18 month forward EPS are 106.80 and 102.17, while TOPIX EPS is currently 90.74 as of 13th February.
SMAM revised down corporate profit growth to +7.6% YoY from +11.2% YoY for its research universe 200
companies (ex. Financials) for FY2014 as resource businesses such as petroleum and mining posted write-off
in October-December quarter led by lower oil price.
However, SMAM expects +14.8% profit growth in FY2015 as corporate earnings are expected to continue
solid recover due to global economic growth and stabilized oil prices.
TOPIX EPS and IBES forward EPS (12month&18month)
120
106.80
100 102.17
90.74
80
60
40
TOPIX EPS
20 IBES forward EPS (12m)
IBES forward EPS (18m)
0
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
(Source) IBES 12month forward EPS, SMAM Up to February 13th 2015
14TOPIX range forecast: Fairly valued but profit growth momentum accelerated
IBES 12 month forward EPS forecast for TOPIX was JPY102.17 as of February 13 2015. P/E has ranged
between 13x and 15x since Abe government resumed. Based on these values, TOPIX is estimated to be
between 1,328 and 1,532. This shows current Japanese stocks and TOPIX of 1,482 as of February 18 are fairly
valued within this range.
SMAM expects +7.6% and +14.8% profit growth in FY2014 and FY2015 for the research universe 200
companies (ex. Financials). Corporate profit growth momentum is going to accelerate.
TOPIX and P/E based on IBES 12month forward EPS
1,900
TOPIX P/E 11x P/E 12x
P/E 13x P/E 14x P/E 15x
1,700 P/E 16x
1,500
1,300
1,100
900
700
500
300
Feb-05 Dec-05 Oct-06 Aug-07 Jun-08 Apr-09 Feb-10 Dec-10 Oct-11 Aug-12 Jun-13 Apr-14 Feb-15
*1: Calender year, week-end Topix, PEx based on IBES 12month forward EPS
*2: SMAM forecast is expected based on earnings projection of ERG core univers (ex. Financials) Up to February 13th 2015
(Source) Tokyo Stock Exchange, IBES 12month forward EPS, SMAM
15Supply / Demand analysis: Program / Arbitrage trading buy positions Vs. Nikkei 225
The stock market would often advance while the buy positions for Program / Arbitrage trading (=cash and carry
positions) are increasing. Many of those positions are closed by reversing sell transactions and the market
would often decline.
The Chart shows Nikkei 225 Index gained alongside the increasing in Program / Arbitrage buy positions for the
period 2013-2014. However, Nikkei is moving higher, while the buy positions are growing little in 2015. Current
rally is likely to continue under the light selling pressure.
(JPY Million) Program/Arbitrage Trading Buy Positions and Nikkei 225
4,500,000 20,000
4,000,000
18,000
3,500,000
3,000,000 16,000
2,500,000
14,000
2,000,000
1,500,000 12,000
1,000,000
Arbitrage Trading Buy Positions (LHS) 10,000
500,000 Nikkei 225 (RHS)
0 8,000
(Source) Tokyo Stock Exchange Upto 16th February 2015
16Disclaimer
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.
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© Sumitomo Mitsui Asset Management Company, Limited
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