Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>A comment from a Smartkarma client prompted me to dig through this. It was an interesting comment suggesting the high weight Nikkei 225 names, or high weight-low float names were getting squeezed by BOJ buying or by a short squeeze on the short basket which had been proposed by a number of sellside brokers after the BOJ dropped its Nikkei 225 buying. The likelihood and nature of the change in Nikkei 225 buying by the BOJ was most recently discussed in the insights below:</p>
<table class="table table-striped">
<tbody>
<tr>
<td colspan="3">
<h2>Insights This Past Summer on BOJ ETF Buying and Nikkei 225</h2>
</td>
</tr>
<tr>
<td><strong>Date</strong></td>
<td><strong>Before/After BOJ</strong></td>
<td><strong>Title of Insight</strong></td>
</tr>
<tr>
<td>19-Jul-2018</td>
<td>Before</td>
<td><a href="https://www.smartkarma.com/insights/japan-passive-boj-heading-for-trouble-with-nikkei-225" target="_blank" data-smartkarma-citation="insights:21980">JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225</a></td>
</tr>
<tr>
<td>23-Jul-2018</td>
<td>Before</td>
<td><a href="https://www.smartkarma.com/insights/japan-passive-the-nikkei-225-baskets-if-boj-changes" target="_blank" data-smartkarma-citation="insights:22367">JAPAN PASSIVE:  The Nikkei 225 Baskets if BOJ Changes</a></td>
</tr>
<tr>
<td>27-Jul-2018</td>
<td>Before</td>
<td><a href="https://www.smartkarma.com/insights/japan-passive-boj-to-buy-less-nikkei-225-highly-likely" target="_blank" data-smartkarma-citation="insights:22484">JAPAN PASSIVE - BOJ To Buy Less Nikkei 225? Highly Likely</a></td>
</tr>
<tr>
<td>31-Jul-2018</td>
<td>After</td>
<td><a href="https://www.smartkarma.com/insights/japan-passive-dovish-meeting-boj-to-buy-less-nikkei-225" target="_blank" data-smartkarma-citation="insights:22617">JAPAN PASSIVE - Dovish Meeting; BOJ to Buy Less Nikkei 225</a></td>
</tr>
</tbody>
</table>
<p>However, the BOJ and Nikkei 225 story has been a deceased equine I have been belabouring for 2+ years.</p>
<p>Of course, the trigger for many people's suggestions of a trade was the decision by the BOJ on 31 July to lower its annual rate of purchases of ETFs in the grouping of the TOPIX, Nikkei 225, and JPX Nikkei 400 basket which was seeing total buys of ¥3.0trln a year (in addition to the ¥2.7trln on TOPIX alone) to ¥1.5trln, raising and lifting the portion of "only TOPIX" to ¥4.2trln. That meant the total to be bought in Nikkei would drop from about ¥1.3-1.4trln to about half that, and JPX Nikkei 400 saw its portion of BOJ ETF buys drop to very low single digit percentages, with TOPIX taking about 85% of total buys from there on.</p>
<p>As described in numerous insights on Smartkarma dating back a few years, it is to be noted that the "float" on several Japanese stocks in the Nikkei 225 is not really "float" and <em>Real World Float</em> is much smaller. In some cases single digit percentages of the shares outstanding.</p>
<p>Many of us have watched the 70+% performance since end-August for <a href="https://www.smartkarma.com/entities/320" target="_blank" data-smartkarma-citation="entities:320:1">Familymart Uny Holdings (8028 JP)</a> - one of my favored names to get heavily sold should the Nikkei 225 actually change its weighting methodology as I proposed earlier this year. It has been the avatar for high weight low-float names in the Nikkei 225.</p>
<p>So I tested the idea. The results were <em>somewhat</em> <em>surprising</em>.</p>

A comment from a Smartkarma client prompted me to dig through this. It was an interesting comment suggesting the high weight Nikkei 225 names, or high weight-low float names were getting squeezed by BOJ buying or by a short squeeze on the short basket which had been proposed by a number of sellside brokers after the BOJ dropped its Nikkei 225 buying. The likelihood and nature of the change in Nikkei 225 buying by the BOJ was most recently discussed in the insights below:




Insights This Past Summer on BOJ ETF Buying and Nikkei 225



Date
Before/After BOJ
Title of Insight


19-Jul-2018
Before
JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225


23-Jul-2018
Before
JAPAN PASSIVE:  The Nikkei 225 Baskets if BOJ Changes


27-Jul-2018
Before
JAPAN PASSIVE - BOJ To Buy Less Nikkei 225? Highly Likely


31-Jul-2018
After
JAPAN PASSIVE - Dovish Meeting; BOJ to Buy Less Nikkei 225



However, the BOJ and Nikkei 225 story has been a deceased equine I have been belabouring for 2+ years.
Of course, the trigger for many people's suggestions of a trade was the decision by the BOJ on 31 July to lower its annual rate of purchases of ETFs in the grouping of the TOPIX, Nikkei 225, and JPX Nikkei 400 basket which was seeing total buys of ¥3.0trln a year (in addition to the ¥2.7trln on TOPIX alone) to ¥1.5trln, raising and lifting the portion of "only TOPIX" to ¥4.2trln. That meant the total to be bought in Nikkei would drop from about ¥1.3-1.4trln to about half that, and JPX Nikkei 400 saw its portion of BOJ ETF buys drop to very low single digit percentages, with TOPIX taking about 85% of total buys from there on.
As described in numerous insights on Smartkarma dating back a few years, it is to be noted that the "float" on several Japanese stocks in the Nikkei 225 is not really "float" and Real World Float is much smaller. In some cases single digit percentages of the shares outstanding.
Many of us have watched the 70+% performance since end-August for Familymart Uny Holdings (8028 JP) - one of my favored names to get heavily sold should the Nikkei 225 actually change its weighting methodology as I proposed earlier this year. It has been the avatar for high weight low-float names in the Nikkei 225.
So I tested the idea. The results were somewhat surprising.

Is It a Nikkei BOJ Squeeze on Nikkei 225 Low Float Names? Or Just FamilyMart Being FamilyMart?

Equity Analyst, LightStream Research

Farha Sabri

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Bottom-Up

<ul class="">
<li>Shin-Etsu released its 2QFY03/19 results on Friday, recording an upward revision to its FY03/19 guidance following positive performance across all business segments mainly from the PVC/Chlor-Alkali business. The company has already achieved 50.8% of revenue guidance and 53.7% of OP guidance as of 1HFY03/19.</li>
<li>When compared to its historical FY1 PE of 19.1x, Shin-Etsu continues to remain cheap, currently trading at an FY1 PE of 12.2x (36.1% cheaper than the historical median). Similarly, the company’s current FY1 EV/OP at 6.7x is cheaper than its historical median of 10.7x (37.4% cheaper than the historical median).</li>
</ul>


Shin-Etsu released its 2QFY03/19 results on Friday, recording an upward revision to its FY03/19 guidance following positive performance across all business segments mainly from the PVC/Chlor-Alkali business. The company has already achieved 50.8% of revenue guidance and 53.7% of OP guidance as of 1HFY03/19.
When compared to its historical FY1 PE of 19.1x, Shin-Etsu continues to remain cheap, currently trading at an FY1 PE of 12.2x (36.1% cheaper than the historical median). Similarly, the company’s current FY1 EV/OP at 6.7x is cheaper than its historical median of 10.7x (37.4% cheaper than the historical median).


Shin-Etsu Revises FY03/19 Upwards Guidance Following Strong 1H Performance

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Quantitative Analysis

<p><strong>SHORT-LIVED</strong> - The much-lauded 'breakout' in the <a href="https://www.smartkarma.com/entities/22909" target="_blank" data-smartkarma-citation="entities:22909:1">Nikkei 225 (NKY INDEX)</a> at the end of last month proved to be short-lived. As measured by Total Market Value in Yen (TMV), the market peaked at ¥726.7t on 25th September, revisited that level in 2nd October and promptly fell by 8% in eight days. Despite a modest recovery towards the end of last week, TMV is now 6.5% lower year-to-date and down 1.3% over one year.  Although the TMV has, so far, held above ¥665t - the lower bound of the nine-month trading range - in US$ terms, last week saw a break below US$6t to a new one-year low. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/245/original/2018-10-21_10-24-24.png?1540085075" class="editor-image img-responsive" data-smartkarma-image-id="67245"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>SPIKED</strong> - As highlighted in our last update <a href="https://www.smartkarma.com/insights/japan-fortnightly-update-celebration" target="_blank" data-smartkarma-citation="insights:24383">Celebration</a>, both the 5-Day Relative Strength Index and 25-Day Toraku were signalling caution, which proved to be correct. Having peaked at its highest level in a year, on Monday, the former registered its second-lowest reading in over three years, while the latter has reverted to a neutral reading. In addition, the 52-week New High minus New Low indicator saw its third-lowest reading in three years. While these indicators suggest a possible short-term rebound ahead, they have yet to show the degree of capitulation indicative of a change in market trend which continues to be range-bound. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/246/original/2018-10-21_10-51-59.png?1540086749" class="editor-image img-responsive" data-smartkarma-image-id="67246"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/249/original/2018-10-21_10-52-14.png?1540087713" class="editor-image img-responsive" data-smartkarma-image-id="67249"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/250/original/2018-10-21_11-07-45.png?1540087729" class="editor-image img-responsive" data-smartkarma-image-id="67250"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>CHEAPER YET</strong> - The 333 earnings revisions and 437 results announcements since 24th September have had almost no impact on aggregate TTM and Forecast Net and Operating Income - the exception being a 0.15% decline in Forecast Operating Income. TTM Net Income remains 4% higher than Forecast Net Income and offers scope for some upward revisions as half-year results for March year-end companies are announced over the next four weeks. The current TTM PER is at a three-year low of 14 times and also offers a degree of support. However, should the first-half results confirm the caution inherent in current forecasts, further market weakness is likely.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/253/original/2018-10-21_11-46-25.png?1540090011" class="editor-image img-responsive" data-smartkarma-image-id="67253"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>WEAKER ¥ TO CURTAIL NEGATIVE EARNINGS MOMENTUM </strong>- The Japan Analytics' Results and Revision Scores measure the cap-weighted momentum of earnings results and forecasts/revisions for all listed companies. Both scores have been in decline since peaking in January 2018 and October 2017, respectively. Historically, one of the principal drivers of earnings has been the change in the US$/¥ exchange rate lagged six months. The recent peak in the Yen coincided with the March fiscal year-end and explains the cautious initial forecasts for the current year. The ¥10 downwards swing in the last six months boosted Q1 results and will do so again for the first half results. A recovery in earnings momentum would be a positive surprise an would provide some upside to the market.   </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/259/original/2018-10-21_13-22-32.png?1540095762" class="editor-image img-responsive" data-smartkarma-image-id="67259"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/260/original/2018-10-21_13-23-52.png?1540095850" class="editor-image img-responsive" data-smartkarma-image-id="67260"></figure><div class="content-caption">Source: Japan Analytics</div><div class="content-highlight"><p><strong>OUTLOOK</strong> - The 'dip' we expected after the September breakout was more severe than anticipated due to the confluence of some external factors. Local macroeconomic indicators are still far from positive. Industrial production is flatlining, and current trends in the German auto sector does not bode well for Japanese auto manufacturing. Higher wage incomes have been matched by food and energy price inflation and consumers have so far preferred to save rather than spend ahead of next year's 2% rise in the consumption tax. As usual, the results and revisions announced over the next four weeks will be the primary driver of stock returns and, with the market neither overbought nor overvalued, there is scope for some upside. Nevertheless, given the continuing macro concerns, the best-expected outcome is that the market stays within its nine-month trading range.  </p></div>

SHORT-LIVED - The much-lauded 'breakout' in the Nikkei 225 (NKY INDEX) at the end of last month proved to be short-lived. As measured by Total Market Value in Yen (TMV), the market peaked at ¥726.7t on 25th September, revisited that level in 2nd October and promptly fell by 8% in eight days. Despite a modest recovery towards the end of last week, TMV is now 6.5% lower year-to-date and down 1.3% over one year.  Although the TMV has, so far, held above ¥665t - the lower bound of the nine-month trading range - in US$ terms, last week saw a break below US$6t to a new one-year low. Source: Japan AnalyticsSPIKED - As highlighted in our last update Celebration, both the 5-Day Relative Strength Index and 25-Day Toraku were signalling caution, which proved to be correct. Having peaked at its highest level in a year, on Monday, the former registered its second-lowest reading in over three years, while the latter has reverted to a neutral reading. In addition, the 52-week New High minus New Low indicator saw its third-lowest reading in three years. While these indicators suggest a possible short-term rebound ahead, they have yet to show the degree of capitulation indicative of a change in market trend which continues to be range-bound. Source: Japan AnalyticsCHEAPER YET - The 333 earnings revisions and 437 results announcements since 24th September have had almost no impact on aggregate TTM and Forecast Net and Operating Income - the exception being a 0.15% decline in Forecast Operating Income. TTM Net Income remains 4% higher than Forecast Net Income and offers scope for some upward revisions as half-year results for March year-end companies are announced over the next four weeks. The current TTM PER is at a three-year low of 14 times and also offers a degree of support. However, should the first-half results confirm the caution inherent in current forecasts, further market weakness is likely.Source: Japan AnalyticsWEAKER ¥ TO CURTAIL NEGATIVE EARNINGS MOMENTUM - The Japan Analytics' Results and Revision Scores measure the cap-weighted momentum of earnings results and forecasts/revisions for all listed companies. Both scores have been in decline since peaking in January 2018 and October 2017, respectively. Historically, one of the principal drivers of earnings has been the change in the US$/¥ exchange rate lagged six months. The recent peak in the Yen coincided with the March fiscal year-end and explains the cautious initial forecasts for the current year. The ¥10 downwards swing in the last six months boosted Q1 results and will do so again for the first half results. A recovery in earnings momentum would be a positive surprise an would provide some upside to the market.   Source: Japan AnalyticsOUTLOOK - The 'dip' we expected after the September breakout was more severe than anticipated due to the confluence of some external factors. Local macroeconomic indicators are still far from positive. Industrial production is flatlining, and current trends in the German auto sector does not bode well for Japanese auto manufacturing. Higher wage incomes have been matched by food and energy price inflation and consumers have so far preferred to save rather than spend ahead of next year's 2% rise in the consumption tax. As usual, the results and revisions announced over the next four weeks will be the primary driver of stock returns and, with the market neither overbought nor overvalued, there is scope for some upside. Nevertheless, given the continuing macro concerns, the best-expected outcome is that the market stays within its nine-month trading range.  

Thematic (Sector/Industry)

<p>Between writing our piece, <a href="https://www.smartkarma.com/insights/the-fiasco-that-is-the-silicon-wafer-shortage-to-continue-well-into-2018-and-beyond" target="_blank" data-smartkarma-citation="insights:18565">The Fiasco That Is the Silicon Wafer Shortage to Continue Well into 2018 and Beyond</a>, and now, there hasn’t been much improvement on the silicon wafer shortage front. Manufacturers are still slow to adapt capacity expansions and price hikes on silicon wafers still continue to be implemented at double digit rates. In this insight, we will take a closer look at the key industries driving the demand for wafers, particularly from memory semiconductors. Moreover, we will also be looking at the slowdown in die shrinkage, another key factor causing the wafer supply shortage.</p>

Between writing our piece, The Fiasco That Is the Silicon Wafer Shortage to Continue Well into 2018 and Beyond, and now, there hasn’t been much improvement on the silicon wafer shortage front. Manufacturers are still slow to adapt capacity expansions and price hikes on silicon wafers still continue to be implemented at double digit rates. In this insight, we will take a closer look at the key industries driving the demand for wafers, particularly from memory semiconductors. Moreover, we will also be looking at the slowdown in die shrinkage, another key factor causing the wafer supply shortage.

Silicon Wafer Manufacturers’ Share Price Performance Diverges from Supply Demand Situation

<p style="text-align: center;"><strong>APATHY STRIKES AGAIN</strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/686/original/2018-09-23_17-11-57.png?1537690346" class="editor-image img-responsive" data-smartkarma-image-id="64686"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>THE APATHY INDICATOR - </strong>Our Fortnightly Update for 26th August highlighted the lack of market activity after the end of the results announcements over the previous six weeks. In recent years, similar periods of apathy had coincided with market turning points, usually to the upside. After an initial rally the following week, our 'apathy indicator' added another three signals before the market subsequently bottomed out on 7th September. Since then, Total Market Value has risen by 6.7%, TOPIX has had its best week in almost two years, both the 50 and 200-day moving averages were surpassed and, on Friday, the Value Traded Ratio had its fifth-best day of the year. Its 'party-time' here indeed.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/690/original/2018-09-23_17-44-03.png?1537692262" class="editor-image img-responsive" data-smartkarma-image-id="64690"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>BREAKOUT</strong> - Much fanfare was also made over the fact that the <a href="https://www.smartkarma.com/entities/22909" target="_blank" data-smartkarma-citation="entities:22909:1">Nikkei 225 (NKY INDEX)</a> reached a 26-year high and broke out of nine-month and 22-year trading ranges. Although such positive news is always welcome for us Japan-only 'diehards', both TOPIX and TOPIX-US$ reached new 26-year highs in January, only to later fade away for the next seven months. New highs for both these indices are required to confirm that the December 1989 high is indeed again the target.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/701/original/2018-09-05_19-59-32.png?1537698981" class="editor-image img-responsive" data-smartkarma-image-id="64701"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>GAIJIN WRONGFOOTED</strong> - As <a href="https://www.smartkarma.com/profiles/25" target="_blank" data-smartkarma-citation="accounts:25">Travis Lundy</a> noted on 2nd September - <a href="https://www.smartkarma.com/insights/japan-flow-redux-foreign-investor-flows-still-matter-and-they-are-still-cyclical" target="_blank" data-smartkarma-citation="insights:23654">Foreign Investor Flows (Still) Matter, and They Are (Still) Cyclical</a>, foreign investor flows have recently been at 'the lower end of the cycle' and foreign investors tend to be pro-cyclical price-takers chasing returns on a net exposure basis driven by the relative performance of the US$TOPIX/S&amp;P 500 ratio. As we also noted in <a href="https://www.smartkarma.com/insights/japan-seasonality-sell-in-july-and-say-goodbye-please-come-back-on-culture-day" target="_blank" data-smartkarma-citation="insights:23682">Japan: Seasonality</a>, historically September is the second-worst performing month in the Japanese market calendar with October being the fourth-worst. Add some concerns over trade and auto tariffs to the mix and a portfolio underweighting of Japan at the start of this quarter was not going to alarm any trustees. Given all of the above and with a holiday this Monday, some sharp short-covering was also in evidence towards to end of last week in anticipation of more leisurely-timed long-only fund flows to come.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/704/original/2018-09-23_20-08-06.png?1537700901" class="editor-image img-responsive" data-smartkarma-image-id="64704"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>CHEAP + UPSIDE TO FORECASTS</strong> - The last two weeks have taken the total market cap (ex REITs) to back above ¥700t, however, the trailing-twelve-month (TTM) PER is still below 15x. In aggregate the current forecasts for current year's Net Income are nearly ¥2t behind the TTM data, leaving scope for some market-boosting upward revisions in November as the (mostly interim) results are announced. Assuming upward revisions bring forecasts in line with our estimate the November TTM aggregate Net Income of ¥50t, the market PE at the January peak capitalisation would still be below 15x.  </p><p><strong>CAVEATS</strong> - Curbing the enthusiasm in the last paragraph are some macro caveats. Industrial production has slowed to nearly zero in recent months, and higher wage income is being mostly channelled into increased savings. For the first time in the post-WWII era, both profit's share and labour's share of GDP exceed 12%. Both cannot continue to rise in tandem indefinitely, and we would expect the former to turn down before the latter. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/705/original/2018-09-23_20-19-16.png?1537701582" class="editor-image img-responsive" data-smartkarma-image-id="64705"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/707/original/2018-09-23_20-34-21.png?1537702506" class="editor-image img-responsive" data-smartkarma-image-id="64707"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>OUTLOOK</strong> - After a hectic four-day week and another shortened week to come, a pause would be welcome. The 5-day Relative Strength Index at 91 is at its highest level since 8th November 2017 and is in the first percentile of occurrences over the last three years. The 25-day Toraku advance-decline indicator is also nearing '120'. Although this is far from perfect as an indicator, recent peaks and troughs have coincided with Toraku outliers. Two weeks ago, we suggested the market would rise and Yen would fall 'into the month end absent any adverse developments on the trade front'. With newly-re-elected PM Abe in New York this week, we expect another quiet week for the continuing (now sector-specific) Japan-US trade negotiations. Further Yen weakness would limit any short-term profit-taking, and there are still enough global portfolios underweight Japan to buy the coming dip and support rolling our forecast forward until month-end.</p><p><strong>SECTOR RECOMMENDATIONS</strong> - Our sector recommendations have fared less well over the last two weeks. Our most-preferred marginally out-performed our least-preferred with the gains in <strong>Energy</strong> and <strong>Telecoms</strong> offsetting 'losses' from underweights in<strong> Utilities</strong>, <strong>Machinery</strong>, <strong>Real Estate</strong> and <strong>Autos</strong> and overweights in <strong>Information Technology</strong> and <strong>Other Commercial Products</strong>. </p><p><strong>COMPANIES</strong> - Our results, revisions and stock performance reviews below contain short comments on <a href="https://www.smartkarma.com/entities/11720" target="_blank" data-smartkarma-citation="entities:11720:1">Kikkoman (2801 JP)</a>, <a href="https://www.smartkarma.com/entities/4102" target="_blank" data-smartkarma-citation="entities:4102:1">Nissan Chemical (4021 JP)</a> and <a href="https://www.smartkarma.com/entities/1496" target="_blank" data-smartkarma-citation="entities:1496:1">Showa Denko (4004 JP)</a>.</p>

APATHY STRIKES AGAINSource: Japan AnalyticsTHE APATHY INDICATOR - Our Fortnightly Update for 26th August highlighted the lack of market activity after the end of the results announcements over the previous six weeks. In recent years, similar periods of apathy had coincided with market turning points, usually to the upside. After an initial rally the following week, our 'apathy indicator' added another three signals before the market subsequently bottomed out on 7th September. Since then, Total Market Value has risen by 6.7%, TOPIX has had its best week in almost two years, both the 50 and 200-day moving averages were surpassed and, on Friday, the Value Traded Ratio had its fifth-best day of the year. Its 'party-time' here indeed.Source: Japan AnalyticsBREAKOUT - Much fanfare was also made over the fact that the Nikkei 225 (NKY INDEX) reached a 26-year high and broke out of nine-month and 22-year trading ranges. Although such positive news is always welcome for us Japan-only 'diehards', both TOPIX and TOPIX-US$ reached new 26-year highs in January, only to later fade away for the next seven months. New highs for both these indices are required to confirm that the December 1989 high is indeed again the target.Source: Japan AnalyticsGAIJIN WRONGFOOTED - As Travis Lundy noted on 2nd September - Foreign Investor Flows (Still) Matter, and They Are (Still) Cyclical, foreign investor flows have recently been at 'the lower end of the cycle' and foreign investors tend to be pro-cyclical price-takers chasing returns on a net exposure basis driven by the relative performance of the US$TOPIX/S&amp;P 500 ratio. As we also noted in Japan: Seasonality, historically September is the second-worst performing month in the Japanese market calendar with October being the fourth-worst. Add some concerns over trade and auto tariffs to the mix and a portfolio underweighting of Japan at the start of this quarter was not going to alarm any trustees. Given all of the above and with a holiday this Monday, some sharp short-covering was also in evidence towards to end of last week in anticipation of more leisurely-timed long-only fund flows to come.Source: Japan AnalyticsCHEAP + UPSIDE TO FORECASTS - The last two weeks have taken the total market cap (ex REITs) to back above ¥700t, however, the trailing-twelve-month (TTM) PER is still below 15x. In aggregate the current forecasts for current year's Net Income are nearly ¥2t behind the TTM data, leaving scope for some market-boosting upward revisions in November as the (mostly interim) results are announced. Assuming upward revisions bring forecasts in line with our estimate the November TTM aggregate Net Income of ¥50t, the market PE at the January peak capitalisation would still be below 15x.  CAVEATS - Curbing the enthusiasm in the last paragraph are some macro caveats. Industrial production has slowed to nearly zero in recent months, and higher wage income is being mostly channelled into increased savings. For the first time in the post-WWII era, both profit's share and labour's share of GDP exceed 12%. Both cannot continue to rise in tandem indefinitely, and we would expect the former to turn down before the latter. Source: Japan AnalyticsOUTLOOK - After a hectic four-day week and another shortened week to come, a pause would be welcome. The 5-day Relative Strength Index at 91 is at its highest level since 8th November 2017 and is in the first percentile of occurrences over the last three years. The 25-day Toraku advance-decline indicator is also nearing '120'. Although this is far from perfect as an indicator, recent peaks and troughs have coincided with Toraku outliers. Two weeks ago, we suggested the market would rise and Yen would fall 'into the month end absent any adverse developments on the trade front'. With newly-re-elected PM Abe in New York this week, we expect another quiet week for the continuing (now sector-specific) Japan-US trade negotiations. Further Yen weakness would limit any short-term profit-taking, and there are still enough global portfolios underweight Japan to buy the coming dip and support rolling our forecast forward until month-end.SECTOR RECOMMENDATIONS - Our sector recommendations have fared less well over the last two weeks. Our most-preferred marginally out-performed our least-preferred with the gains in Energy and Telecoms offsetting 'losses' from underweights in Utilities, Machinery, Real Estate and Autos and overweights in Information Technology and Other Commercial Products. COMPANIES - Our results, revisions and stock performance reviews below contain short comments on Kikkoman (2801 JP), Nissan Chemical (4021 JP) and Showa Denko (4004 JP).

Japan

Shin-Etsu Chemical Co., Ltd. produces and distributes synthetic resins and other chemical products such as fertilizers. The Company also manufactures electronic materials such as semiconductor silicon, synthetic, and rare earth quartz. Shin-Etsu Chemical operates in Japan and overseas.

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Shin Etsu Chemical (4063 JP)

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