Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

‘Rising Innovation 2022’ is the latest 3-Year Business Plan for <a href="https://www.smartkarma.com/entities/tsukuba-bank-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:16705:1">Tsukuba Bank (8338 JP)</a>, a small and constantly-struggling regional bank from Ibaraki Prefecture, to the northeast of Tokyo.  The bank missed all but one of its key objectives in its previous Business Plan, but there were no consequences for senior management.  No demotions or bonus cuts, no acceptance of responsibility.  Just business as usual.  Regardless of the optimistic forecasts in the new Business Plan, growth in recent years has been virtually non-existent, FY3/2019 results missed guidance by a country mile, the bank’s stock price remains close to a 52-week low, and current guidance calls for further declines in reported profits in FY3/2020.  Yet foreign investors in aggregate own around 14% of the stock.  We fail to understand why.  Caveat emptor!  (May the buyer beware!)

‘Rising Innovation 2022’ is the latest 3-Year Business Plan for Tsukuba Bank (8338 JP), a small and constantly-struggling regional bank from Ibaraki Prefecture, to the northeast of Tokyo.  The bank missed all but one of its key objectives in its previous Business Plan, but there were no consequences for senior management.  No demotions or bonus cuts, no acceptance of responsibility.  Just business as usual.  Regardless of the optimistic forecasts in the new Business Plan, growth in recent years has been virtually non-existent, FY3/2019 results missed guidance by a country mile, the bank’s stock price remains close to a 52-week low, and current guidance calls for further declines in reported profits in FY3/2020.  Yet foreign investors in aggregate own around 14% of the stock.  We fail to understand why.  Caveat emptor!  (May the buyer beware!)    

Tsukuba Bank (8338.JP): Rising Innovation, Falling Momentum: Plus Ça Change...

Back in 2007, foreign investors in aggregate owned around 27% of the stock of <a href="https://www.smartkarma.com/entities/16705" target="_blank" data-smartkarma-citation="entities:16705:1">Tsukuba Bank (8338 JP)</a> , a small and constantly struggling regional bank from Ibaraki Prefecture: the smallest regional bank operating in the wealthy Kanto Region surrounding Tokyo.  Wisely, after a succession of guidance misses and disappointing financial results from the bank, foreigners have cut that aggregate investment to 14%.  Still not wise enough, some might say: Tsukuba Bank has considerable historic ‘form’ when it comes to failing to deliver on expectations.  FY3/2019 results missed guidance by a country mile, its stock price is perilously close to a 52-week low, and current guidance calls for further declines in reported profits in FY3/2020.  Caveat emptor!  (May the buyer beware!)

Back in 2007, foreign investors in aggregate owned around 27% of the stock of Tsukuba Bank (8338 JP) , a small and constantly struggling regional bank from Ibaraki Prefecture: the smallest regional bank operating in the wealthy Kanto Region surrounding Tokyo.  Wisely, after a succession of guidance misses and disappointing financial results from the bank, foreigners have cut that aggregate investment to 14%.  Still not wise enough, some might say: Tsukuba Bank has considerable historic ‘form’ when it comes to failing to deliver on expectations.  FY3/2019 results missed guidance by a country mile, its stock price is perilously close to a 52-week low, and current guidance calls for further declines in reported profits in FY3/2020.  Caveat emptor!  (May the buyer beware!)

Tsukuba Bank (8338 JP):  Scuba Diving on an Empty Tank

'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

SHORT-LIVED - Over the last two weeks, Japanese equities marched back up and then promptly fell back down, losing 1.5% over the period. We remain under the spell of the 'Death Cross' (50-day moving average &lt; 200-day), although, partly thanks to the Bank of Japan, we have danced along the fine line between these two ratios since August.  A decisive breach to the downside is now the most likely outcome and would help bring foreign investors back to a market they have become increasingly less interested in as the year has progressed.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/070/118/original/2018-11-17_10-47-31.png?1542419262" class="editor-image img-responsive" data-smartkarma-image-id="70118"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/070/119/original/2018-11-17_10-47-53.png?1542419283" class="editor-image img-responsive" data-smartkarma-image-id="70119"></figure><div class="content-caption">Source: Japan Analytics</div>VOLUME VOLATILITY - After spiking into the most recent low, volumes have returned to trend levels and will decline further into year-end as is usual.  A <a href="https://www.jpx.co.jp/english/corporate/news/news-releases/0060/b5b4pj000002jlgo-att/01.pdf" target="_blank">malfunction </a>in the TSE trading systems occurred on October 9th and the apportioning of the 'blame' is now the subject of some heated <a href="http://www.asahi.com/ajw/articles/AJ201810190030.html" target="_blank">debate</a> amongst the market participants involved. It is not clear to what extent this event has had any subsequent impact on the activities of the firms involved, and the only remedial action that has been announced to date has been a salary cut and censure for the <a href="https://www.smartkarma.com/entities/11266" target="_blank" data-smartkarma-citation="entities:11266:1">Japan Exchange (8697 JP)</a> officials deemed responsible. We would note that, since October 9th, volumes have been more volatile than any other period this year.   <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/070/120/original/2018-11-17_11-00-22.png?1542420041" class="editor-image img-responsive" data-smartkarma-image-id="70120"></figure><div class="content-caption">Source: Japan Analytics</div>FINAL TALLY - With the exception of <a href="https://www.smartkarma.com/entities/7591" target="_blank" data-smartkarma-citation="entities:7591:1">Tokio Marine (8766 JP)</a>, <a href="https://www.smartkarma.com/entities/631" target="_blank" data-smartkarma-citation="entities:631:1">MS&amp;AD (8725 JP)</a> and <a href="https://www.smartkarma.com/entities/632" target="_blank" data-smartkarma-citation="entities:632:1">Sompo (8630 JP)</a>, all of whom report tomorrow, the quarterly results and revisions 'season' is now complete. As noted <a href="https://www.smartkarma.com/insights/japan-autumn-results-revisions-flash-flatlining-weakest-quarter-in-two-years" target="_blank" data-smartkarma-citation="insights:25804">earlier</a>, the most recent quarter was the weakest in two years. TTM Operating Income and Forecast Operating Income are both unchanged from the summer, and Forecast Operating Income is only 0.8% higher than TTM Operating Income -implying a flat second quarter for earnings. The 'gap' between TTM and Forecast Net Income is now -4.8%, implying that there are over ¥2 trillion of extraordinary losses to be booked in the next six months. A 'foretaste' of such write-offs was recently provided by <a href="https://www.smartkarma.com/entities/16705" target="_blank" data-smartkarma-citation="entities:16705:1">Tsukuba Bank (8338 JP)</a>.MARKET-IMPLIED 20% FALL IN EARNINGS - Based on TTM Net Income the market PER is a record-low 13.2x, and the discounting of the coming weaker earnings growth is reasonably well-advanced. A 'normal' earnings multiple is often thought to be 16.7x (being the 'inverse' of a 6% yield). The market-implied decline in future Net Income, using this benchmark,  is 20%, which is equivalent to an aggregate Net Income of ¥38.6t - the level achieved in Summer 2017, or five quarters ago.  <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/070/124/original/2018-11-17_11-48-39.png?1542422946" class="editor-image img-responsive" data-smartkarma-image-id="70124"></figure><div class="content-caption">Source: Japan Analytics</div><div class="content-highlight">OUTLOOK - Although 58% of companies still have positive Results Scores, only 40% of companies saw a quarter-on-quarter improvement and 40% of revisions scored negatively.  As covered in <a href="https://www.smartkarma.com/insights/japan-autumn-results-revisions-scores-market-composite-sector-review-slomo-slowdown" target="_blank" data-smartkarma-citation="insights:25923">SloMo Slowdown</a>, we are in a slow-motion bear market that will accelerate in the event of any further Yen strength or erosion of global growth. The downside may be limited by current valuations. However, we have yet to see how far Japanese corporate profits can fall this time. As we noted <a href="https://www.smartkarma.com/insights/japan-market-update-oversold-however" target="_blank" data-smartkarma-citation="insights:25370">here</a>, a decisive low has yet to be reached.</div>

SHORT-LIVED - Over the last two weeks, Japanese equities marched back up and then promptly fell back down, losing 1.5% over the period. We remain under the spell of the 'Death Cross' (50-day moving average &lt; 200-day), although, partly thanks to the Bank of Japan, we have danced along the fine line between these two ratios since August.  A decisive breach to the downside is now the most likely outcome and would help bring foreign investors back to a market they have become increasingly less interested in as the year has progressed.Source: Japan AnalyticsVOLUME VOLATILITY - After spiking into the most recent low, volumes have returned to trend levels and will decline further into year-end as is usual.  A malfunction in the TSE trading systems occurred on October 9th and the apportioning of the 'blame' is now the subject of some heated debate amongst the market participants involved. It is not clear to what extent this event has had any subsequent impact on the activities of the firms involved, and the only remedial action that has been announced to date has been a salary cut and censure for the Japan Exchange (8697 JP) officials deemed responsible. We would note that, since October 9th, volumes have been more volatile than any other period this year.   Source: Japan AnalyticsFINAL TALLY - With the exception of Tokio Marine (8766 JP), MS&amp;AD (8725 JP) and Sompo (8630 JP), all of whom report tomorrow, the quarterly results and revisions 'season' is now complete. As noted earlier, the most recent quarter was the weakest in two years. TTM Operating Income and Forecast Operating Income are both unchanged from the summer, and Forecast Operating Income is only 0.8% higher than TTM Operating Income -implying a flat second quarter for earnings. The 'gap' between TTM and Forecast Net Income is now -4.8%, implying that there are over ¥2 trillion of extraordinary losses to be booked in the next six months. A 'foretaste' of such write-offs was recently provided by Tsukuba Bank (8338 JP).MARKET-IMPLIED 20% FALL IN EARNINGS - Based on TTM Net Income the market PER is a record-low 13.2x, and the discounting of the coming weaker earnings growth is reasonably well-advanced. A 'normal' earnings multiple is often thought to be 16.7x (being the 'inverse' of a 6% yield). The market-implied decline in future Net Income, using this benchmark,  is 20%, which is equivalent to an aggregate Net Income of ¥38.6t - the level achieved in Summer 2017, or five quarters ago.  Source: Japan AnalyticsOUTLOOK - Although 58% of companies still have positive Results Scores, only 40% of companies saw a quarter-on-quarter improvement and 40% of revisions scored negatively.  As covered in SloMo Slowdown, we are in a slow-motion bear market that will accelerate in the event of any further Yen strength or erosion of global growth. The downside may be limited by current valuations. However, we have yet to see how far Japanese corporate profits can fall this time. As we noted here, a decisive low has yet to be reached.

Japan Fortnightly Update: Watch Out Below

SLOWING MOMENTUM - The All-Market Composite Results Score - a measure of the trend and momentum in quarterly corporate earnings - peaked out at the end of January and has now declined for ten straight months. Reported earnings are still rising year-on-year, however, the rate of change is slowing. The All-Market Composite Forecast/Revision Score - which measures the trend and rate of change in company initial forecasts and revisions - also peaked out in October 2017, three months ahead of the peak in the Results Score, once again demonstrating the reliability of company forecasts as a broad leading indicator of future earnings.   
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/069/792/original/2018-11-14_12-51-09.png?1542167489" class="editor-image img-responsive" data-smartkarma-image-id="69792"></figure>
<div class="content-caption">Source: Japan Analytics</div>
TURNING NEGATIVE? - On each of the three occasions since 2006 when the Results Score has fallen below '4', it has subsequently fallen below zero. In 2012, the decline was muted by the advent of the Bank of Japan (BOJ)'s policy of weakening the currency. The current score of 4.07 suggests we are poised to retread the path to zero.  Failing a currency move through ¥115, the All-Market Composite Results Score should turn negative by the time the full-year results are announced next May.
SLOW-MOTION BEAR MARKET - The TOPIX index has fallen by 14.3% since January 23rd, with most of the decline occurring in the last thirty trading days. May's sharp decline in both the Results and Revision Scores was largely ignored as the poor fourth-quarter results, and muted company forecasts were deemed to be one-off and 'conservative', respectively. This autumn's earnings season which finished yesterday has confirmed the validity of companies' earlier caution and a 'stealth' or slow-motion bear market is gathering steam.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/069/898/original/2018-11-15_10-48-15.png?1542246527" class="editor-image img-responsive" data-smartkarma-image-id="69898"></figure>
<div class="content-caption">Source: Japan Analytics</div>
BUYER OF JAPAN - The BoJ is continuing to smooth out the pace of the decline using its continuing programme of exchange-traded fund purchases.  Such purchases reached a new high last month and can be expected to provide future unfair-weather-support into every forthcoming market decline.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/069/952/original/2018-11-15_21-28-19.png?1542284961" class="editor-image img-responsive" data-smartkarma-image-id="69952"></figure>
<div class="content-caption">Source: Japan Analytics, Bank of Japan</div>
THE BoA-ML 'GLOBAL WAVE' - Much like Korean export data, Japanese corporate profits are often considered to be a bellwether for global economic trends. BofA Merrill Lynch's long-standing 'Global Wave' indicator is a useful measure of trends in global economic activity and aligns almost perfectly with the Results Score, confirming Japan's status as the most cyclically-sensitive developed market in terms of equity exposure. In line with our Results Score, BofA-ML called a peak in the Wave in Q1, and the indicator has continued to grind lower since. Only two of the ten 'troughs' since 1988 have exceeded a wave score of '50'. With the current US Federal Reserve tightening policy likely to remain unchanged for the next two quarters, a 'Global Wave' trough below '50' next year is probable. 
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/069/900/original/File%202018-11-15%207%2048%2033%20%282%29.jpeg?1542246831" class="editor-image img-responsive" data-smartkarma-image-id="69900"></figure>
THE GET OUT OF JAIL CARD? - In the past, a weaker Yen - as seen in 2012/13 and again in 2017 - has provided a welcome boost to corporate profitability, however, as <a href="https://www.smartkarma.com/profiles/710" target="_blank" data-smartkarma-citation="accounts:710">Pelham Smithers</a> discusses <a href="https://www.smartkarma.com/insights/can-japan-inc-protect-earnings-on-the-downside" target="_blank" data-smartkarma-citation="insights:25957">here</a>, the Yen 'has a nasty habit of strengthening as the Japanese economy deteriorates'. We agree that the BoJ's current policy mix is more proactive than in the past and that safe-haven status for the Yen in the next global recession is not an automatic assumption.  However, if the relative rate structure between the US and Japan becomes less extreme, a weaker Yen is a less-likely prospect.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/069/793/original/2018-11-14_12-52-50.png?1542167598" class="editor-image img-responsive" data-smartkarma-image-id="69793"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<div class="content-highlight">
RECOMMENDATION - Although current valuations are attractive, we believe the market is correctly anticipating further declines in earnings momentum over the next few quarters.  We would now underweight Japanese equities by 20% (i.e. 5.5% v. 7%) with a bias towards domestic sectors and financials and without any currency hedge.
</div>

SLOWING MOMENTUM - The All-Market Composite Results Score - a measure of the trend and momentum in quarterly corporate earnings - peaked out at the end of January and has now declined for ten straight months. Reported earnings are still rising year-on-year, however, the rate of change is slowing. The All-Market Composite Forecast/Revision Score - which measures the trend and rate of change in company initial forecasts and revisions - also peaked out in October 2017, three months ahead of the peak in the Results Score, once again demonstrating the reliability of company forecasts as a broad leading indicator of future earnings.   

Source: Japan Analytics
TURNING NEGATIVE? - On each of the three occasions since 2006 when the Results Score has fallen below '4', it has subsequently fallen below zero. In 2012, the decline was muted by the advent of the Bank of Japan (BOJ)'s policy of weakening the currency. The current score of 4.07 suggests we are poised to retread the path to zero.  Failing a currency move through ¥115, the All-Market Composite Results Score should turn negative by the time the full-year results are announced next May.
SLOW-MOTION BEAR MARKET - The TOPIX index has fallen by 14.3% since January 23rd, with most of the decline occurring in the last thirty trading days. May's sharp decline in both the Results and Revision Scores was largely ignored as the poor fourth-quarter results, and muted company forecasts were deemed to be one-off and 'conservative', respectively. This autumn's earnings season which finished yesterday has confirmed the validity of companies' earlier caution and a 'stealth' or slow-motion bear market is gathering steam.

Source: Japan Analytics
BUYER OF JAPAN - The BoJ is continuing to smooth out the pace of the decline using its continuing programme of exchange-traded fund purchases.  Such purchases reached a new high last month and can be expected to provide future unfair-weather-support into every forthcoming market decline.

Source: Japan Analytics, Bank of Japan
THE BoA-ML 'GLOBAL WAVE' - Much like Korean export data, Japanese corporate profits are often considered to be a bellwether for global economic trends. BofA Merrill Lynch's long-standing 'Global Wave' indicator is a useful measure of trends in global economic activity and aligns almost perfectly with the Results Score, confirming Japan's status as the most cyclically-sensitive developed market in terms of equity exposure. In line with our Results Score, BofA-ML called a peak in the Wave in Q1, and the indicator has continued to grind lower since. Only two of the ten 'troughs' since 1988 have exceeded a wave score of '50'. With the current US Federal Reserve tightening policy likely to remain unchanged for the next two quarters, a 'Global Wave' trough below '50' next year is probable. 

THE GET OUT OF JAIL CARD? - In the past, a weaker Yen - as seen in 2012/13 and again in 2017 - has provided a welcome boost to corporate profitability, however, as Pelham Smithers discusses here, the Yen 'has a nasty habit of strengthening as the Japanese economy deteriorates'. We agree that the BoJ's current policy mix is more proactive than in the past and that safe-haven status for the Yen in the next global recession is not an automatic assumption.  However, if the relative rate structure between the US and Japan becomes less extreme, a weaker Yen is a less-likely prospect.

Source: Japan Analytics

RECOMMENDATION - Although current valuations are attractive, we believe the market is correctly anticipating further declines in earnings momentum over the next few quarters.  We would now underweight Japanese equities by 20% (i.e. 5.5% v. 7%) with a bias towards domestic sectors and financials and without any currency hedge.


Japan: Autumn Results & Revisions Scores - Market Composite & Sector Review  - SloMo Slowdown

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/034/original/2018-08-16_19-07-34.png?1534672507" class="editor-image img-responsive" data-smartkarma-image-id="61034"></figure><div class="content-caption">Source: Japan Analytics</div>A GOOD QUARTER - The Composite Results Score has now declined for seven months in a row and is implying a slowing of the upward momentum in earnings.  However, the score has only declined by 31 basis points since last quarter showing a degree of 'stability' seen only in 2011 in recent years.  The aggregate Forecast/Revision score has also continued to decline and is now lower for the fourth straight month. As would be expected, this score is a reliable leading indicator for the Results Score and suggests further weakening in the rate of earnings growth in the months ahead.  Neither score is, as yet, suggesting a decline in earnings before the end of the fiscal year.YEN CORRELATION WEAKENING - This quarter's earnings' stability was surprising given the relative strength of the Yen compared to a year ago. In the past and even as recently as 2016, a 5 per cent year-on-year decline has resulted in negative Results Scores. The year-on-year change in now positive so any negative impact will dissipate over the next two quarters.MARKET FOLLOWS MOMENTUM LOWER - The All Market Composite peaked on 23rd January and has since fallen by 11% despite a continuation of the Bank of Japan's ETF purchasing programme. Weakening earnings momentum and the overvaluation of many of the leading stocks, as in our '<a href="https://www.smartkarma.com/insights/japan-most-overbought-most-oversold-the-relative-price-score" target="_blank" data-smartkarma-citation="insights:21149">Nifty 50</a>' portfolio, have been contributing factors. With prospects for a much weaker Yen limited by the current trade negotiations between Japan and the United States, and with global growth slowing, we expect both Results and Revision Scores to trend lower, but to end the fiscal year in positive territory. Historically, the market has not risen during periods when both the Results and Forecast/Revision Scores have been trending down.<div class="content-highlight">MARKET RECOMMENDATION - Within a global portfolio, we would market-weight Japanese equities with a bias towards domestic sectors and not hedge the currency exposure.</div>SECTOR RESULTS SCORES -The good news is that only one sector, (Multi-Industry - 75% of which is <a href="https://www.smartkarma.com/entities/359" target="_blank" data-smartkarma-citation="entities:359:1">Japan Post [6178 JP</a>]) has a negative score - and its score is less negative than last quarter. Both the Media and Consumer Services sectors' scores turned positive and each increased by more than two points.  On the other hand, over half of our 29 sectors saw declining scores, although the number was lower than last quarter.  The top sectors in terms of quarter-on-quarter change were Energy, Consumer Services, Media, Information Technology and Other Commercial Products while the laggards were Non-Bank Finance, Chemicals, Construction, Machinery and Utilities. SECTOR REVISION SCORES - Five sectors have negative Forecast/Revision Scores with Utilities now joining Media, Multi-Industry, Autos and Banks from last quarter. The highest scores are in the Energy, Technology Hardware, Electrical Equipment, Retail and Information Technology sectors. Improvements of greater than one point were seen in Energy, Media and Machinery while Food, Beverages &amp; Tobacco, Chemicals, Utilities, Other Materials and Technology Hardware all lost more than one point. Overall eighteen sectors saw declines.REVISION V. RESULTS SCORES - The difference between the Results and Revision Scores is a good indicator of corporate expectations compared with the trailing-twelve-month reality. In some cases (e.g. Restaurants) the 'optimism' is due to a failure to revise forecasts in the light of weaker results. In others, such as Telecommunications, there is scope for upward revisions in the coming quarters.<div class="content-highlight">
THE OPTIMISTS
Restaurants • Other Materials • Electrical Equipment • Technology Hardware • Retail
THE PESSIMISTS
Banks • Autos • Telecommunications • Utilities • Media • Chemicals
</div>SECTOR PERFORMANCE - Over the last three months, our Japan Market Composite declined by 5.8%. Only four sectors saw an increase in value led by Telecommunications, Energy, Commercial Services and Information Technology. The largest declines were in the Building Materials, Metals, Real Estate Construction and Machinery sectors. Nine sectors are now negative over one year led by Building Materials, Metals and Food, Beverages &amp; Tobacco and only eight are up in double-digits led by Services and Information Technology. For the time being, Domestic Non-Manufacturing sectors 'rules the roost' and Domestic Cyclical sectors have taken over from Global Cyclicals in the 'doghouse'.'.<div class="content-highlight">
SECTOR RECOMMENDATIONS
Our most-preferred sectors are currently Energy, Healthcare, Telecommunications, Other Commercial Products and Information Technology.
Least-preferred sectors are Metals, Chemicals, Machinery, Autos, Construction, Real Estate, Building Materials, Food Beverages &amp; Tobacco and Utilities.
</div>TOP 5 LARGER PEER GROUPS - The top five Peer Groups capitalised at over ¥1 trillion are Machine Tools &amp; Presses, PC &amp; Computer Peripherals, Oil &amp; Gas Refining &amp; Marketing, Telecom Distribution Services and Sporting &amp; Outdoor Goods. The top twenty larger Peer Groups have gained 16% over one year but have declined by 4% on average the last three months.BOTTOM 5 LARGER PEER GROUPS - The bottom five Peer Groups capitalised at over ¥1 trillion are Audio/Visual Content, LCD/LED Materials &amp; Equipment, Electrical Engineering, General Contractors and Real Estate - Leasing. The bottom twenty larger Peer Groups have lost 2% over one year and 9% over the last three months. Only Security Services and Tobacco have risen since May.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/038/original/2018-08-19_19-33-03.png?1534674804" class="editor-image img-responsive" data-smartkarma-image-id="61038"></figure>

Source: Japan AnalyticsA GOOD QUARTER - The Composite Results Score has now declined for seven months in a row and is implying a slowing of the upward momentum in earnings.  However, the score has only declined by 31 basis points since last quarter showing a degree of 'stability' seen only in 2011 in recent years.  The aggregate Forecast/Revision score has also continued to decline and is now lower for the fourth straight month. As would be expected, this score is a reliable leading indicator for the Results Score and suggests further weakening in the rate of earnings growth in the months ahead.  Neither score is, as yet, suggesting a decline in earnings before the end of the fiscal year.YEN CORRELATION WEAKENING - This quarter's earnings' stability was surprising given the relative strength of the Yen compared to a year ago. In the past and even as recently as 2016, a 5 per cent year-on-year decline has resulted in negative Results Scores. The year-on-year change in now positive so any negative impact will dissipate over the next two quarters.MARKET FOLLOWS MOMENTUM LOWER - The All Market Composite peaked on 23rd January and has since fallen by 11% despite a continuation of the Bank of Japan's ETF purchasing programme. Weakening earnings momentum and the overvaluation of many of the leading stocks, as in our 'Nifty 50' portfolio, have been contributing factors. With prospects for a much weaker Yen limited by the current trade negotiations between Japan and the United States, and with global growth slowing, we expect both Results and Revision Scores to trend lower, but to end the fiscal year in positive territory. Historically, the market has not risen during periods when both the Results and Forecast/Revision Scores have been trending down.MARKET RECOMMENDATION - Within a global portfolio, we would market-weight Japanese equities with a bias towards domestic sectors and not hedge the currency exposure.SECTOR RESULTS SCORES -The good news is that only one sector, (Multi-Industry - 75% of which is Japan Post [6178 JP]) has a negative score - and its score is less negative than last quarter. Both the Media and Consumer Services sectors' scores turned positive and each increased by more than two points.  On the other hand, over half of our 29 sectors saw declining scores, although the number was lower than last quarter.  The top sectors in terms of quarter-on-quarter change were Energy, Consumer Services, Media, Information Technology and Other Commercial Products while the laggards were Non-Bank Finance, Chemicals, Construction, Machinery and Utilities. SECTOR REVISION SCORES - Five sectors have negative Forecast/Revision Scores with Utilities now joining Media, Multi-Industry, Autos and Banks from last quarter. The highest scores are in the Energy, Technology Hardware, Electrical Equipment, Retail and Information Technology sectors. Improvements of greater than one point were seen in Energy, Media and Machinery while Food, Beverages &amp; Tobacco, Chemicals, Utilities, Other Materials and Technology Hardware all lost more than one point. Overall eighteen sectors saw declines.REVISION V. RESULTS SCORES - The difference between the Results and Revision Scores is a good indicator of corporate expectations compared with the trailing-twelve-month reality. In some cases (e.g. Restaurants) the 'optimism' is due to a failure to revise forecasts in the light of weaker results. In others, such as Telecommunications, there is scope for upward revisions in the coming quarters.
THE OPTIMISTS
Restaurants • Other Materials • Electrical Equipment • Technology Hardware • Retail
THE PESSIMISTS
Banks • Autos • Telecommunications • Utilities • Media • Chemicals
SECTOR PERFORMANCE - Over the last three months, our Japan Market Composite declined by 5.8%. Only four sectors saw an increase in value led by Telecommunications, Energy, Commercial Services and Information Technology. The largest declines were in the Building Materials, Metals, Real Estate Construction and Machinery sectors. Nine sectors are now negative over one year led by Building Materials, Metals and Food, Beverages &amp; Tobacco and only eight are up in double-digits led by Services and Information Technology. For the time being, Domestic Non-Manufacturing sectors 'rules the roost' and Domestic Cyclical sectors have taken over from Global Cyclicals in the 'doghouse'.'.
SECTOR RECOMMENDATIONS
Our most-preferred sectors are currently Energy, Healthcare, Telecommunications, Other Commercial Products and Information Technology.
Least-preferred sectors are Metals, Chemicals, Machinery, Autos, Construction, Real Estate, Building Materials, Food Beverages &amp; Tobacco and Utilities.
TOP 5 LARGER PEER GROUPS - The top five Peer Groups capitalised at over ¥1 trillion are Machine Tools &amp; Presses, PC &amp; Computer Peripherals, Oil &amp; Gas Refining &amp; Marketing, Telecom Distribution Services and Sporting &amp; Outdoor Goods. The top twenty larger Peer Groups have gained 16% over one year but have declined by 4% on average the last three months.BOTTOM 5 LARGER PEER GROUPS - The bottom five Peer Groups capitalised at over ¥1 trillion are Audio/Visual Content, LCD/LED Materials &amp; Equipment, Electrical Engineering, General Contractors and Real Estate - Leasing. The bottom twenty larger Peer Groups have lost 2% over one year and 9% over the last three months. Only Security Services and Tobacco have risen since May.

Japan: Results & Revision Scores Summer 2018 Update - Market Composite, Sectors & Peer Groups

Japan

Tsukuba Bank, Ltd. provides commercial and personal banking services. The Bank offers personal and business checking, savings accounts, mortgages, issues credit card, and business loans for customers. Tsukuba Bank serves customers in Japan.

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