Japan Making sense of the cyclical and the structural Webcall - PowerPoint PPT Presentation

Japan – Making sense of the cyclical and the structural Webcall November 2017 Paul Chesson This presentation is for Professional Clients only and is not for consumer use. Head of Japanese Equities 14566/SC/NR/IPJ std UK/Jul17

Making sense of the cyclical and the structural 1. The Background

Japan: Machine tool orders Machine tool orders 70% 50% 30% Yoy change 10% -10% -30% -50% 14566/SC/NR/IPJ std UK/Jul17 12 13 14 15 16 Domestic Foreign Total Source: SMBC Nikko/Japan Machine Tool Builders Association as at 30 September 2017. 3

Capital expenditure Historical capital spending by investment motive (manufacturing) 14566/SC/NR/IPJ std UK/Jul17 Source: Development Bank of Japan; survey date of June 2017. 4

Japan: Pre-tax profit growth 14 12 10 8 6 4 2 0 14566/SC/NR/IPJ std UK/Jul17 FY3/15 FY3/16 FY3/17 est. FY3/18 est. Recurring profits - All industries, yoy % Source: MUMSS, from Nikkei Bulk, and Toyo Keizai Japan Company Handbook data as of 2 October 2017. Note: Figures cover TSE1 firms (ex. financials) with March FY-ends. Excludes sales and OP at wholesale trade companies. Estimates FY12 onward are based on companies or Toyo Keizai estimates, whichever are newer. 5

Japanese profits are very sensitive to the Yen Topix EPS and Trade-weighted Yen 130 90 120 100 110 110 100 120 90 130 80 140 70 150 60 50 160 14566/SC/NR/IPJ std UK/Jul17 12 13 14 15 16 17 TOPIX EPS (lhs) JPY - TWI Index Spot Index (mid price), rhs Source: Bloomberg, SMBC Nikko as at 22 September 2017. Note: EPS forecast is 12-month forward IBES consensus Sources: Thomson Reuters Datastream, SMBC NIKKO. 6

What about monetary policy? 3 measures of inflation CPI, % 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 14566/SC/NR/IPJ std UK/Jul17 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Headline CPI CPI ex-food CPI ex-food and energy Source: Mitsubishi as at 11 October 2017. Data to 31 August 2017 (latest available). 7

Wage growth is lagging the tightness of the labour market 1.6 9.0% 1.4 7.0% 1.2 5.0% 1.0 3.0% 0.8 1.0% 0.6 -1.0% 0.4 -3.0% 14566/SC/NR/IPJ std UK/Jul17 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Japan ratio of job offers to applicant Japan average hourly cash earnings, y/y 6mma (rhs) Source: Credit Suisse as at 11 October 2017. Data to 31 August 2017 (latest available). 8

Part time wages growing more quickly than full time wages Hourly scheduled pay, % yoy 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 14566/SC/NR/IPJ std UK/Jul17 -1.5 Jan 10 Jan 12 Jan 14 Jan 16 Total Full-timers Part-timers Source: Barclays Research, Instant Insights as at 6 October 2017. 9

Japan: Corporate cash Cash holdings vs. interest-bearing debt, excludes financials, % 50 45 40 35 30 14566/SC/NR/IPJ std UK/Jul17 25 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 TOPIX S&P500 STOXX600 Source: Goldman Sachs as at 11 October 2017. Data to 30 September 2017. 10

Total shareholder returns from Japanese companies Yen, trillion 18 16 14 12 10 8 6 4 2 0 14566/SC/NR/IPJ std UK/Jul17 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E Dividends Share buybacks Source: Nomura data and estimates as at 11 October 2017. Universe is all listed Japanese companies. 11

Different views about Japanese corporate cash % 90 80 70 60 50 40 30 20 10 0 14566/SC/NR/IPJ std UK/Jul17 Have more than enough Just about right Not enough Companies Investors Source: Mizuho Securities Equity Research based on Life Insurance Association of Japan as at 23 March 2017. 12

Making sense of the cyclical and the structural 2. Our strategy

Japan: Forward PE ratios 12m forward PE, x 40.0x 35.0x 30.0x 25.0x 20.0x 15.0x 10.0x 5.0x 0.0x 14566/SC/NR/IPJ std UK/Jul17 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Japan Universe >USD 500mn Macro-Cyclicals Macro-Defensives Source: HSBC as at 31 August 2017. Japanese universe - all Japanese stocks with minimum market cap of USD 500mn and at least three FY1/FY2 EPS estimates. The universe is rebalanced annually on December 31 of each year. Macro-cyclical and macro-defensive stocks are the top decile (upper 10%) of our macro correlation rankings, also conducted on December 31 of each year. 14

Japan: Earnings revisions 0.60 0.40 0.20 Earnings revision ratio 0.00 -0.20 -0.40 -0.60 -0.80 14566/SC/NR/IPJ std UK/Jul17 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Japan Universe >USD 500mn Macro-Cyclicals Macro-Defensives Source: HSBC as at 31 August 2017. Japanese universe - all Japanese stocks with minimum market cap of USD 500mn and at least three FY1/FY2 EPS estimates. The universe is rebalanced annually on December 31 of each year. Macro-cyclical and macro-defensive stocks are the top decile (upper 10%) of our macro correlation rankings, also conducted on December 31 of each year. 15

Invesco Perpetual Japan Fund Most active sectors Top 5 overweights Fund % Index % 1 Active % Banks 18.42 7.61 10.80 Transportation Equipment 15.56 8.94 6.63 Mining 6.90 0.33 6.57 Real Estate 8.72 2.30 6.42 Iron & Steel 7.03 1.22 5.81 Top 5 underweights Fund % Index % 1 Active % Information & Communication 1.58 7.79 -6.21 Chemicals 1.20 7.09 -5.89 Wholesale Trade 0.00 4.58 -4.58 14566/SC/NR/IPJ std UK/Jul17 Land Transportation 0.00 4.03 -4.03 Electric Appliances 9.93 13.41 -3.48 Source: Invesco as at 30 September 2017. 1 Reference Index: Topix first section. 16

Japanese banks: Comparison of valuations PER PBR ROE (%) Div.Yield (%) FY17E FY16A FY16A FY16A Japan MUFG 9.8 0.6 7.7 2.5 SMFG 9.4 0.6 10.3 3.7 US Bank of America 14.4 1.1 6.7 1.0 Citigroup 14.5 1.0 6.6 0.6 Europe HSBC 14.2 1.2 1.1 5.2 Banco Santander 12.6 0.9 6.9 3.6 14566/SC/NR/IPJ std UK/Jul17 Source: Deutsche Bank Group as at 29 September 2017. For Japanese Banks, FY16=FY3/17 and FY17=FY3/18. For illustrative purposes only. 17

Relative performance of bank shares vs UST 10Y Relative performance of bank shares vs UST 10Y 120 2.80 2.60 110 2.40 100 2.20 90 2.00 1.80 80 1.60 70 1.40 60 1.20 14566/SC/NR/IPJ std UK/Jul17 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Performance of bank shares relative to market (LHS) UST 10Y (%, RHS) Source: Deutsche Bank as at 27 September 2017, 18

Toyota ▪ Benefitting from the increase in anti-diesel feeling. Q1 vehicle sales up 8% in Europe with 40% of these being hybrids. ▪ Toyota have taken a conservative approach to provisioning with allowance for credit losses at a 6 year high and implied deprecation on operating leases at a 7 year high. ▪ Net cash and near cash of the automotive business is equal to roughly half their market value. Dividends and continuous buybacks give a shareholder return yield of over 5%. 14566/SC/NR/IPJ std UK/Jul17 Source: Toyota, Deutsche Bank as at September 2017. 19

Toyota share price Jan 2015 = 100 120 110 100 90 80 70 60 14566/SC/NR/IPJ std UK/Jul17 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Toyota share price Source: Bloomberg as at 11 October 2017. For illustrative purposes only. 20

Inpex ▪ Japan’s largest E&P oil and gas miner ▪ Most significant asset is the Ichthys LNG field in Australia, which is scheduled to begin producing in 2018, adding significant growth to sales and profits. 75% of output already under long term contract ▪ Consensus EPS forecast go from Y31 for 03/17 to Y38 for 03/18, Y57 for 03/19 (source: Bloomberg as at 11/10/17) ▪ Company’s investment phase in Ichthys nearly over, improving cash flow should mean higher dividends, PBR 0.5x, DY 1.5 (source: Bloomberg as at 11/10/17) 14566/SC/NR/IPJ std UK/Jul17 Source: Invesco Perpetual as at October 2017 unless otherwise stated. For illustrative purposes only. 21

Inpex share price Jan 2015 = 100 130 120 110 100 90 80 70 60 50 14566/SC/NR/IPJ std UK/Jul17 40 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Price Source: Bloomberg as at 11 October 2017. For illustrative purposes only. 22

Invesco Perpetual Japan Fund Top ten active sectors Top 10 Fund % Index % 1 Active % Banks 18.42 7.61 10.80 Transportation Equipment 15.56 8.94 6.63 Mining 6.90 0.33 6.57 Real Estate 8.72 2.30 6.42 Iron & Steel 7.03 1.22 5.81 Machinery 9.45 5.38 4.07 Rubber Products 2.31 1.01 1.30 Insurance 3.64 2.34 1.30 Oil & Coal Products 1.37 0.57 0.80 Services 4.18 4.11 0.07 14566/SC/NR/IPJ std UK/Jul17 Source: Invesco Perpetual as at 30 September 2017. 1 Reference Index: Topix first section. 23