Japan

In this briefing:

1. Confluence of Politics – China Bans Australian Coal Imports (Flash Note)
2. Japan Drugstores Set to Expand Further
3. ECB, BoJ Suck Wind – EA Threatened with Japanisation
4. Foldable Smartphones to Debut in 2019; Will It Aid an Industry Turnaround?
5. Komatsu, HCM and CAT Tactical Recovery Targets and Macro Pivot Support

1. Confluence of Politics – China Bans Australian Coal Imports (Flash Note)

• China implements coal import caps specifically targeting Australian producers
• Unclear as to how widespread these restrictions will eventually be
• Thermal and metallurgical coal exports affected
• Impacting ~A$8.4Bn of metallurgical coal exports; or 4.4% of national income
• Thermal coal exports affected worth ~A$3.8Bn; or an additional 2% of national income
• Collectively, thermal and metallurgical exports equate to ~0.9% of Australian annual GDP 
• Actions appear to be a response to blocking Huawei bidding for the 5G network
• Recent Chinese cyber-attacks harden Australian Government’s resolve
• Expect similar Chinese measures (in time) to be applied to other commodities and industries

2. Japan Drugstores Set to Expand Further

The drugstore sector has been the fastest growing retail sector after e-commerce in the last decade, boosted by the popularity of Japanese toiletry and cosmetics brands among tourists and the push for market share by leading players.

Drugstores already account for 40% of cosmetics sales and their share of other key categories is growing, even in food, with some chains already selling enough food to qualify as top 20 supermarkets (in 2017, 26.2% of drugstore sales came from food).

Future profit growth will be determined by prescription services, food and M&A, with all of the leading firms racing to build capacity.

3. ECB, BoJ Suck Wind – EA Threatened with Japanisation

By Charles Dumas, Chief Economist

• Monetary stimulus fails export-dependent savings glut countries
• Japan now accepts huge budget deficits and negative interest rates
• EA needs broad structural reform to avoid Japan’s deep malaise

4. Foldable Smartphones to Debut in 2019; Will It Aid an Industry Turnaround?

Plans regarding Samsung and Huawei’s foldable smartphones are out. The companies, which happen to be two of the largest contenders in the smartphone landscape are expected to unveil their foldable smartphone prototypes this month. In 4Q2018, Samsung, coming in first place, held a market share of 18.7% while Huawei, in third place, held a market share of 16.1%. Both companies are following different strategies when it comes to their foldable phone models.

The concept of foldable phones revolves around devices that can be folded into the size of a smartphone or opened up in to the size of a tablet. Huawei is said to be planning to introduce their foldable smartphone with 5G compatibility while Samsung is planning to release their foldable model with 4G compatibility. The market leader aims to leverage the expertise it has gained on its display technologies in its foldable smartphones.

5. Komatsu, HCM and CAT Tactical Recovery Targets and Macro Pivot Support

We thought a technical view on these counters would help clarify where tactical rally targets come into play as well as more important macro support levels where a basing process is expected to begin.

Key resistance points can be used as short zones with key pivots stops and limit levels that reign in risk.

All three stocks display varying degrees of a macro descending corrective wedge formations that have yet to fully mature. 

CAT stands out as the more buoyant of the group and faces its own set of upside pivot resistance points with solid macro support to work with on weakness.

We wanted to fold in a technical view with Mio Kato, CFA and his insight Komatsu, HCM, CAT: The Stock Punishment Does Not Match the Outlook Deterioration Crime . This group may be ahead of the earnings curve and why we may see more gas in a corrective bounce cycle (CB easy policy and the hunt for value may be part of the rally) before more pressure points are hit to re test macro support targets.

In this briefing:

1. Japan Department Store Apparel Sales Down 35% in a Decade
2. Japanese Supermarket Consolidation Likely and Soon
3. Japan: Upcycle Intact
4. Naspers: Softbank Buyback a Guide for Naspers?
5. 🇯🇵 JAPAN: Winter Results & Revisions Scores – Market Composite & Sector Review – Chilling

1. Japan Department Store Apparel Sales Down 35% in a Decade

Last month, the Japan Department Store Association (JDSA) announced a 1.1% drop in sales at department stores for calendar year 2018, with sales also down 0.8% on a same-store basis.

This was a reasonable result in a year when there were many store closures, both permanent and temporary, and slow traffic due to extreme weather events, and of course the background trend of an ageing consumer base.

However, the underlying trend remains clear: apparel sales continue to fall, down more than a third in a decade. Meanwhile, cosmetics has seen its share of sales double.

Since apparel accounts for 30% of department store sales on average and as much as 50% for regional stores, this is a serious weakness. With competition from speciality chains and online intensifying yet further and department stores themselves cutting space for apparel, there is unlikely to be any respite.

For this reason, and with further store closures planned in the next few years, the department store sector will continue to contract.

2. Japanese Supermarket Consolidation Likely and Soon

Signs of consolidation in the supermarket sector have come and gone over the past decade, but recent events suggest there will now be a sustained increase.

Traditionalists, and the wholesalers, who control the sector, point to the positives of greater variety and local food differentiation; yet these are what have kept the sector so fragmented and inefficient.

However, with falling populations and a shift to online buying gradually gaining momentum, as well as encroachment from other sectors such as drugstores, the time is ripe for bigger fish to start eating up the many, many tiddlers. 

3. Japan: Upcycle Intact

Following 3Q’s contraction, economic activity rebounded in the final quarter of 2018 led  by investment spending. Global trade tensions and the planned increase in the consumption tax in 2019 are headwinds but we expect the Japanese economy to sail through. The investment upcycle remains intact underpinned by rising profits and consumption spending well supported by easy monetary and fiscal policy. We reiterate our overweight call on Japanese equities.

4. Naspers: Softbank Buyback a Guide for Naspers?

Recently, Softbank’s (9984 JP) shares jumped +18% after announcing a $5.5bn share buyback. Using Smartkarma’s holdco monitor, the discount to NAV had widened to around 55% prior to the announcement but is now sitting around 40-45%. There were a few key reasons for the buyback: (1) the Softbank Corp (9434 JP) (KK) IPO netted $20bn, giving the company the flexibility to do the buyback, and (2) Softbank is taking a more disciplined approach to further platform investments.

Both these arguments are also available to Naspers (NPN SJ) management and a move to buy back 5% of market cap is feasible and we believe would narrow the discount. The question is whether management are listening. They have been dismissive of buybacks in the past but this could change.

5. 🇯🇵 JAPAN: Winter Results & Revisions Scores – Market Composite & Sector Review – Chilling

CHILLING – A winter chill has descended over the Japanese equity market. As we covered in our Insight on market aggregate earnings Japan: Winter Results & Revisions Flash the net income of corporate Japan peaked on 26th December, However, reported earnings are a lagging indicator, and in this instance, the ‘lag’ was almost one year, with the Total Market Capitalisation (excluding REITs) peaking on 23rd January 2018. Our preferred, and often leading, indicators are the All-Market Composite Results Score – a measure of the trend and momentum in quarterly corporate earnings the All-Market Composite Forecast/Revision Score – which measures the trend and rate of change in company initial forecasts and revisions. The Results Score peaked on 1st February 2018, seven trading days after the market peak and is now one year into an extended period of decline. The Forecast/Revision Score is slowing peaked out on 27th October 2017, three months ahead of the market and the Results Score – demonstrating the reliability of company forecasts, as opposed to ‘consensus’, as a leading indicator of future earnings. Revisions have continued to ‘lead’ on the way down and 0.55 points ‘ahead’.   

TURNING NEGATIVE? – Subtracting the Forecast/Revision Score from the Results Score shows the extent of the lag in the latter. The relationship has been relatively stable of over one year; however, as we ‘roll’ into the next fiscal year’s forecasts in May, we can expect the difference to move closer to zero as both scores turn negative. As the cycle bottoms out, the revisions will recover ahead of results, and the difference will also become negative, setting the stage for the next upswing in later 2019 or early 2020.  

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 2.14 suggests we are continuing on a path to zero and below.  Failing a currency move through ¥115 (see below), the Results Score should turn negative by the time the full-year results are announced next May. We also expect a high degree of caution in forecasting, especially on the Auto sector which is overshadowed by the prospect of US tariffs. The announcement of the closer of Honda Motor (7267 JP)‘s car plant in Swindon in the UK is not a good portent.  

BEAR MARKET RALLY & THE YEN – Total Market Value has recovered by 13.8% since Christmas Day and is currently at the same level as when we published our Autumn review – SloMo Slowdown. With earnings and revisions heading lower, the implied expectation is for some or all of – a further central bank easing, a resolution of current trade tensions, and a weakening of the Yen. The last has been the ‘get-out-of-jail’ card for Japanese equities. Our chart compares the year-on-year percentage change in the US$/¥ exchange rate with a lag of six months to the Combined Results and Revision Score (with each sore being equally-weighted). The last eight turning points for the rate of change of the cross rate, have coincided with directional changes in earnings and revisions momentum. The recent weakness in the currency suggests a more stable market – at least until the late spring. 

In this briefing:

1. Japan Drugstores Set to Expand Further
2. ECB, BoJ Suck Wind – EA Threatened with Japanisation
3. Foldable Smartphones to Debut in 2019; Will It Aid an Industry Turnaround?
4. Komatsu, HCM and CAT Tactical Recovery Targets and Macro Pivot Support
5. BoJ Steps in as ECB Exits

1. Japan Drugstores Set to Expand Further

The drugstore sector has been the fastest growing retail sector after e-commerce in the last decade, boosted by the popularity of Japanese toiletry and cosmetics brands among tourists and the push for market share by leading players.

Drugstores already account for 40% of cosmetics sales and their share of other key categories is growing, even in food, with some chains already selling enough food to qualify as top 20 supermarkets (in 2017, 26.2% of drugstore sales came from food).

Future profit growth will be determined by prescription services, food and M&A, with all of the leading firms racing to build capacity.

2. ECB, BoJ Suck Wind – EA Threatened with Japanisation

By Charles Dumas, Chief Economist

• Monetary stimulus fails export-dependent savings glut countries
• Japan now accepts huge budget deficits and negative interest rates
• EA needs broad structural reform to avoid Japan’s deep malaise

3. Foldable Smartphones to Debut in 2019; Will It Aid an Industry Turnaround?

Plans regarding Samsung and Huawei’s foldable smartphones are out. The companies, which happen to be two of the largest contenders in the smartphone landscape are expected to unveil their foldable smartphone prototypes this month. In 4Q2018, Samsung, coming in first place, held a market share of 18.7% while Huawei, in third place, held a market share of 16.1%. Both companies are following different strategies when it comes to their foldable phone models.

The concept of foldable phones revolves around devices that can be folded into the size of a smartphone or opened up in to the size of a tablet. Huawei is said to be planning to introduce their foldable smartphone with 5G compatibility while Samsung is planning to release their foldable model with 4G compatibility. The market leader aims to leverage the expertise it has gained on its display technologies in its foldable smartphones.

4. Komatsu, HCM and CAT Tactical Recovery Targets and Macro Pivot Support

We thought a technical view on these counters would help clarify where tactical rally targets come into play as well as more important macro support levels where a basing process is expected to begin.

Key resistance points can be used as short zones with key pivots stops and limit levels that reign in risk.

All three stocks display varying degrees of a macro descending corrective wedge formations that have yet to fully mature. 

CAT stands out as the more buoyant of the group and faces its own set of upside pivot resistance points with solid macro support to work with on weakness.

We wanted to fold in a technical view with Mio Kato, CFA and his insight Komatsu, HCM, CAT: The Stock Punishment Does Not Match the Outlook Deterioration Crime . This group may be ahead of the earnings curve and why we may see more gas in a corrective bounce cycle (CB easy policy and the hunt for value may be part of the rally) before more pressure points are hit to re test macro support targets.

5. BoJ Steps in as ECB Exits

By Shweta Singh, Managing Director Global Macro

• Global central banks turning dovish
• But BoJ maybe the only DM central bank ‘properly’ injecting liquidity this year
• European debt – including Italian BTPs – could benefit the most  

In this briefing:

1. Foldable Smartphones to Debut in 2019; Will It Aid an Industry Turnaround?
2. Komatsu, HCM and CAT Tactical Recovery Targets and Macro Pivot Support
3. BoJ Steps in as ECB Exits
4. Japan Department Store Apparel Sales Down 35% in a Decade
5. Japanese Supermarket Consolidation Likely and Soon

1. Foldable Smartphones to Debut in 2019; Will It Aid an Industry Turnaround?

Plans regarding Samsung and Huawei’s foldable smartphones are out. The companies, which happen to be two of the largest contenders in the smartphone landscape are expected to unveil their foldable smartphone prototypes this month. In 4Q2018, Samsung, coming in first place, held a market share of 18.7% while Huawei, in third place, held a market share of 16.1%. Both companies are following different strategies when it comes to their foldable phone models.

The concept of foldable phones revolves around devices that can be folded into the size of a smartphone or opened up in to the size of a tablet. Huawei is said to be planning to introduce their foldable smartphone with 5G compatibility while Samsung is planning to release their foldable model with 4G compatibility. The market leader aims to leverage the expertise it has gained on its display technologies in its foldable smartphones.

2. Komatsu, HCM and CAT Tactical Recovery Targets and Macro Pivot Support

We thought a technical view on these counters would help clarify where tactical rally targets come into play as well as more important macro support levels where a basing process is expected to begin.

Key resistance points can be used as short zones with key pivots stops and limit levels that reign in risk.

All three stocks display varying degrees of a macro descending corrective wedge formations that have yet to fully mature. 

CAT stands out as the more buoyant of the group and faces its own set of upside pivot resistance points with solid macro support to work with on weakness.

We wanted to fold in a technical view with Mio Kato, CFA and his insight Komatsu, HCM, CAT: The Stock Punishment Does Not Match the Outlook Deterioration Crime . This group may be ahead of the earnings curve and why we may see more gas in a corrective bounce cycle (CB easy policy and the hunt for value may be part of the rally) before more pressure points are hit to re test macro support targets.

3. BoJ Steps in as ECB Exits

By Shweta Singh, Managing Director Global Macro

• Global central banks turning dovish
• But BoJ maybe the only DM central bank ‘properly’ injecting liquidity this year
• European debt – including Italian BTPs – could benefit the most  

4. Japan Department Store Apparel Sales Down 35% in a Decade

Last month, the Japan Department Store Association (JDSA) announced a 1.1% drop in sales at department stores for calendar year 2018, with sales also down 0.8% on a same-store basis.

This was a reasonable result in a year when there were many store closures, both permanent and temporary, and slow traffic due to extreme weather events, and of course the background trend of an ageing consumer base.

However, the underlying trend remains clear: apparel sales continue to fall, down more than a third in a decade. Meanwhile, cosmetics has seen its share of sales double.

Since apparel accounts for 30% of department store sales on average and as much as 50% for regional stores, this is a serious weakness. With competition from speciality chains and online intensifying yet further and department stores themselves cutting space for apparel, there is unlikely to be any respite.

For this reason, and with further store closures planned in the next few years, the department store sector will continue to contract.

5. Japanese Supermarket Consolidation Likely and Soon

Signs of consolidation in the supermarket sector have come and gone over the past decade, but recent events suggest there will now be a sustained increase.

Traditionalists, and the wholesalers, who control the sector, point to the positives of greater variety and local food differentiation; yet these are what have kept the sector so fragmented and inefficient.

However, with falling populations and a shift to online buying gradually gaining momentum, as well as encroachment from other sectors such as drugstores, the time is ripe for bigger fish to start eating up the many, many tiddlers. 

In this briefing:

1. Komatsu, HCM and CAT Tactical Recovery Targets and Macro Pivot Support
2. BoJ Steps in as ECB Exits
3. Japan Department Store Apparel Sales Down 35% in a Decade
4. Japanese Supermarket Consolidation Likely and Soon
5. Japan: Upcycle Intact

1. Komatsu, HCM and CAT Tactical Recovery Targets and Macro Pivot Support

We thought a technical view on these counters would help clarify where tactical rally targets come into play as well as more important macro support levels where a basing process is expected to begin.

Key resistance points can be used as short zones with key pivots stops and limit levels that reign in risk.

All three stocks display varying degrees of a macro descending corrective wedge formations that have yet to fully mature. 

CAT stands out as the more buoyant of the group and faces its own set of upside pivot resistance points with solid macro support to work with on weakness.

We wanted to fold in a technical view with Mio Kato, CFA and his insight Komatsu, HCM, CAT: The Stock Punishment Does Not Match the Outlook Deterioration Crime . This group may be ahead of the earnings curve and why we may see more gas in a corrective bounce cycle (CB easy policy and the hunt for value may be part of the rally) before more pressure points are hit to re test macro support targets.

2. BoJ Steps in as ECB Exits

By Shweta Singh, Managing Director Global Macro

• Global central banks turning dovish
• But BoJ maybe the only DM central bank ‘properly’ injecting liquidity this year
• European debt – including Italian BTPs – could benefit the most  

3. Japan Department Store Apparel Sales Down 35% in a Decade

Last month, the Japan Department Store Association (JDSA) announced a 1.1% drop in sales at department stores for calendar year 2018, with sales also down 0.8% on a same-store basis.

This was a reasonable result in a year when there were many store closures, both permanent and temporary, and slow traffic due to extreme weather events, and of course the background trend of an ageing consumer base.

However, the underlying trend remains clear: apparel sales continue to fall, down more than a third in a decade. Meanwhile, cosmetics has seen its share of sales double.

Since apparel accounts for 30% of department store sales on average and as much as 50% for regional stores, this is a serious weakness. With competition from speciality chains and online intensifying yet further and department stores themselves cutting space for apparel, there is unlikely to be any respite.

For this reason, and with further store closures planned in the next few years, the department store sector will continue to contract.

4. Japanese Supermarket Consolidation Likely and Soon

Signs of consolidation in the supermarket sector have come and gone over the past decade, but recent events suggest there will now be a sustained increase.

Traditionalists, and the wholesalers, who control the sector, point to the positives of greater variety and local food differentiation; yet these are what have kept the sector so fragmented and inefficient.

However, with falling populations and a shift to online buying gradually gaining momentum, as well as encroachment from other sectors such as drugstores, the time is ripe for bigger fish to start eating up the many, many tiddlers. 

5. Japan: Upcycle Intact

Following 3Q’s contraction, economic activity rebounded in the final quarter of 2018 led  by investment spending. Global trade tensions and the planned increase in the consumption tax in 2019 are headwinds but we expect the Japanese economy to sail through. The investment upcycle remains intact underpinned by rising profits and consumption spending well supported by easy monetary and fiscal policy. We reiterate our overweight call on Japanese equities.

In this briefing:

1. BoJ Steps in as ECB Exits
2. Japan Department Store Apparel Sales Down 35% in a Decade
3. Japanese Supermarket Consolidation Likely and Soon
4. Japan: Upcycle Intact
5. Naspers: Softbank Buyback a Guide for Naspers?

1. BoJ Steps in as ECB Exits

By Shweta Singh, Managing Director Global Macro

• Global central banks turning dovish
• But BoJ maybe the only DM central bank ‘properly’ injecting liquidity this year
• European debt – including Italian BTPs – could benefit the most  

2. Japan Department Store Apparel Sales Down 35% in a Decade

Last month, the Japan Department Store Association (JDSA) announced a 1.1% drop in sales at department stores for calendar year 2018, with sales also down 0.8% on a same-store basis.

This was a reasonable result in a year when there were many store closures, both permanent and temporary, and slow traffic due to extreme weather events, and of course the background trend of an ageing consumer base.

However, the underlying trend remains clear: apparel sales continue to fall, down more than a third in a decade. Meanwhile, cosmetics has seen its share of sales double.

Since apparel accounts for 30% of department store sales on average and as much as 50% for regional stores, this is a serious weakness. With competition from speciality chains and online intensifying yet further and department stores themselves cutting space for apparel, there is unlikely to be any respite.

For this reason, and with further store closures planned in the next few years, the department store sector will continue to contract.

3. Japanese Supermarket Consolidation Likely and Soon

Signs of consolidation in the supermarket sector have come and gone over the past decade, but recent events suggest there will now be a sustained increase.

Traditionalists, and the wholesalers, who control the sector, point to the positives of greater variety and local food differentiation; yet these are what have kept the sector so fragmented and inefficient.

However, with falling populations and a shift to online buying gradually gaining momentum, as well as encroachment from other sectors such as drugstores, the time is ripe for bigger fish to start eating up the many, many tiddlers. 

4. Japan: Upcycle Intact

Following 3Q’s contraction, economic activity rebounded in the final quarter of 2018 led  by investment spending. Global trade tensions and the planned increase in the consumption tax in 2019 are headwinds but we expect the Japanese economy to sail through. The investment upcycle remains intact underpinned by rising profits and consumption spending well supported by easy monetary and fiscal policy. We reiterate our overweight call on Japanese equities.

5. Naspers: Softbank Buyback a Guide for Naspers?

Recently, Softbank’s (9984 JP) shares jumped +18% after announcing a $5.5bn share buyback. Using Smartkarma’s holdco monitor, the discount to NAV had widened to around 55% prior to the announcement but is now sitting around 40-45%. There were a few key reasons for the buyback: (1) the Softbank Corp (9434 JP) (KK) IPO netted $20bn, giving the company the flexibility to do the buyback, and (2) Softbank is taking a more disciplined approach to further platform investments.

Both these arguments are also available to Naspers (NPN SJ) management and a move to buy back 5% of market cap is feasible and we believe would narrow the discount. The question is whether management are listening. They have been dismissive of buybacks in the past but this could change.

In this briefing:

1. Japanese Supermarket Consolidation Likely and Soon
2. Japan: Upcycle Intact
3. Naspers: Softbank Buyback a Guide for Naspers?
4. 🇯🇵 JAPAN: Winter Results & Revisions Scores – Market Composite & Sector Review – Chilling
5. Value-Enhancing 5G Spectrum Allocations on the Way for KDDI, DoCoMo, Softbank and Rakuten

1. Japanese Supermarket Consolidation Likely and Soon

Signs of consolidation in the supermarket sector have come and gone over the past decade, but recent events suggest there will now be a sustained increase.

Traditionalists, and the wholesalers, who control the sector, point to the positives of greater variety and local food differentiation; yet these are what have kept the sector so fragmented and inefficient.

However, with falling populations and a shift to online buying gradually gaining momentum, as well as encroachment from other sectors such as drugstores, the time is ripe for bigger fish to start eating up the many, many tiddlers. 

2. Japan: Upcycle Intact

Following 3Q’s contraction, economic activity rebounded in the final quarter of 2018 led  by investment spending. Global trade tensions and the planned increase in the consumption tax in 2019 are headwinds but we expect the Japanese economy to sail through. The investment upcycle remains intact underpinned by rising profits and consumption spending well supported by easy monetary and fiscal policy. We reiterate our overweight call on Japanese equities.

3. Naspers: Softbank Buyback a Guide for Naspers?

Recently, Softbank’s (9984 JP) shares jumped +18% after announcing a $5.5bn share buyback. Using Smartkarma’s holdco monitor, the discount to NAV had widened to around 55% prior to the announcement but is now sitting around 40-45%. There were a few key reasons for the buyback: (1) the Softbank Corp (9434 JP) (KK) IPO netted $20bn, giving the company the flexibility to do the buyback, and (2) Softbank is taking a more disciplined approach to further platform investments.

Both these arguments are also available to Naspers (NPN SJ) management and a move to buy back 5% of market cap is feasible and we believe would narrow the discount. The question is whether management are listening. They have been dismissive of buybacks in the past but this could change.

4. 🇯🇵 JAPAN: Winter Results & Revisions Scores – Market Composite & Sector Review – Chilling

CHILLING – A winter chill has descended over the Japanese equity market. As we covered in our Insight on market aggregate earnings Japan: Winter Results & Revisions Flash the net income of corporate Japan peaked on 26th December, However, reported earnings are a lagging indicator, and in this instance, the ‘lag’ was almost one year, with the Total Market Capitalisation (excluding REITs) peaking on 23rd January 2018. Our preferred, and often leading, indicators are the All-Market Composite Results Score – a measure of the trend and momentum in quarterly corporate earnings the All-Market Composite Forecast/Revision Score – which measures the trend and rate of change in company initial forecasts and revisions. The Results Score peaked on 1st February 2018, seven trading days after the market peak and is now one year into an extended period of decline. The Forecast/Revision Score is slowing peaked out on 27th October 2017, three months ahead of the market and the Results Score – demonstrating the reliability of company forecasts, as opposed to ‘consensus’, as a leading indicator of future earnings. Revisions have continued to ‘lead’ on the way down and 0.55 points ‘ahead’.   

TURNING NEGATIVE? – Subtracting the Forecast/Revision Score from the Results Score shows the extent of the lag in the latter. The relationship has been relatively stable of over one year; however, as we ‘roll’ into the next fiscal year’s forecasts in May, we can expect the difference to move closer to zero as both scores turn negative. As the cycle bottoms out, the revisions will recover ahead of results, and the difference will also become negative, setting the stage for the next upswing in later 2019 or early 2020.  

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 2.14 suggests we are continuing on a path to zero and below.  Failing a currency move through ¥115 (see below), the Results Score should turn negative by the time the full-year results are announced next May. We also expect a high degree of caution in forecasting, especially on the Auto sector which is overshadowed by the prospect of US tariffs. The announcement of the closer of Honda Motor (7267 JP)‘s car plant in Swindon in the UK is not a good portent.  

BEAR MARKET RALLY & THE YEN – Total Market Value has recovered by 13.8% since Christmas Day and is currently at the same level as when we published our Autumn review – SloMo Slowdown. With earnings and revisions heading lower, the implied expectation is for some or all of – a further central bank easing, a resolution of current trade tensions, and a weakening of the Yen. The last has been the ‘get-out-of-jail’ card for Japanese equities. Our chart compares the year-on-year percentage change in the US$/¥ exchange rate with a lag of six months to the Combined Results and Revision Score (with each sore being equally-weighted). The last eight turning points for the rate of change of the cross rate, have coincided with directional changes in earnings and revisions momentum. The recent weakness in the currency suggests a more stable market – at least until the late spring. 

5. Value-Enhancing 5G Spectrum Allocations on the Way for KDDI, DoCoMo, Softbank and Rakuten

The Ministry of Industry Affairs and Communications (MIC, the regulator) will allocate 2.2 GHz of new spectrum bandwidth by the end of March equal to 2.8x the existing spectrum base. This is not unexpected but we think this is a good opportunity to re-iterate some of the positive points on 5G spectrum as operators make their final applications this month and we wait for a final decision in six weeks. Importantly, with ten spectrum channels, not everyone will be treated equally although all should benefit. We expect Rakuten Inc (4755 JP)  to pick up one-two bands whilst KDDI Corp (9433 JP) , NTT Docomo Inc (9437 JP) and Softbank Corp (9434 JP)  should all receive at least two.

In this briefing:

1. Japan: Upcycle Intact
2. Naspers: Softbank Buyback a Guide for Naspers?
3. 🇯🇵 JAPAN: Winter Results & Revisions Scores – Market Composite & Sector Review – Chilling
4. Value-Enhancing 5G Spectrum Allocations on the Way for KDDI, DoCoMo, Softbank and Rakuten
5. Global Equity Strategy: Constructive Outlook Intact, Bottoming Process Continues

1. Japan: Upcycle Intact

Following 3Q’s contraction, economic activity rebounded in the final quarter of 2018 led  by investment spending. Global trade tensions and the planned increase in the consumption tax in 2019 are headwinds but we expect the Japanese economy to sail through. The investment upcycle remains intact underpinned by rising profits and consumption spending well supported by easy monetary and fiscal policy. We reiterate our overweight call on Japanese equities.

2. Naspers: Softbank Buyback a Guide for Naspers?

Recently, Softbank’s (9984 JP) shares jumped +18% after announcing a $5.5bn share buyback. Using Smartkarma’s holdco monitor, the discount to NAV had widened to around 55% prior to the announcement but is now sitting around 40-45%. There were a few key reasons for the buyback: (1) the Softbank Corp (9434 JP) (KK) IPO netted $20bn, giving the company the flexibility to do the buyback, and (2) Softbank is taking a more disciplined approach to further platform investments.

Both these arguments are also available to Naspers (NPN SJ) management and a move to buy back 5% of market cap is feasible and we believe would narrow the discount. The question is whether management are listening. They have been dismissive of buybacks in the past but this could change.

3. 🇯🇵 JAPAN: Winter Results & Revisions Scores – Market Composite & Sector Review – Chilling

CHILLING – A winter chill has descended over the Japanese equity market. As we covered in our Insight on market aggregate earnings Japan: Winter Results & Revisions Flash the net income of corporate Japan peaked on 26th December, However, reported earnings are a lagging indicator, and in this instance, the ‘lag’ was almost one year, with the Total Market Capitalisation (excluding REITs) peaking on 23rd January 2018. Our preferred, and often leading, indicators are the All-Market Composite Results Score – a measure of the trend and momentum in quarterly corporate earnings the All-Market Composite Forecast/Revision Score – which measures the trend and rate of change in company initial forecasts and revisions. The Results Score peaked on 1st February 2018, seven trading days after the market peak and is now one year into an extended period of decline. The Forecast/Revision Score is slowing peaked out on 27th October 2017, three months ahead of the market and the Results Score – demonstrating the reliability of company forecasts, as opposed to ‘consensus’, as a leading indicator of future earnings. Revisions have continued to ‘lead’ on the way down and 0.55 points ‘ahead’.   

TURNING NEGATIVE? – Subtracting the Forecast/Revision Score from the Results Score shows the extent of the lag in the latter. The relationship has been relatively stable of over one year; however, as we ‘roll’ into the next fiscal year’s forecasts in May, we can expect the difference to move closer to zero as both scores turn negative. As the cycle bottoms out, the revisions will recover ahead of results, and the difference will also become negative, setting the stage for the next upswing in later 2019 or early 2020.  

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 2.14 suggests we are continuing on a path to zero and below.  Failing a currency move through ¥115 (see below), the Results Score should turn negative by the time the full-year results are announced next May. We also expect a high degree of caution in forecasting, especially on the Auto sector which is overshadowed by the prospect of US tariffs. The announcement of the closer of Honda Motor (7267 JP)‘s car plant in Swindon in the UK is not a good portent.  

BEAR MARKET RALLY & THE YEN – Total Market Value has recovered by 13.8% since Christmas Day and is currently at the same level as when we published our Autumn review – SloMo Slowdown. With earnings and revisions heading lower, the implied expectation is for some or all of – a further central bank easing, a resolution of current trade tensions, and a weakening of the Yen. The last has been the ‘get-out-of-jail’ card for Japanese equities. Our chart compares the year-on-year percentage change in the US$/¥ exchange rate with a lag of six months to the Combined Results and Revision Score (with each sore being equally-weighted). The last eight turning points for the rate of change of the cross rate, have coincided with directional changes in earnings and revisions momentum. The recent weakness in the currency suggests a more stable market – at least until the late spring. 

4. Value-Enhancing 5G Spectrum Allocations on the Way for KDDI, DoCoMo, Softbank and Rakuten

The Ministry of Industry Affairs and Communications (MIC, the regulator) will allocate 2.2 GHz of new spectrum bandwidth by the end of March equal to 2.8x the existing spectrum base. This is not unexpected but we think this is a good opportunity to re-iterate some of the positive points on 5G spectrum as operators make their final applications this month and we wait for a final decision in six weeks. Importantly, with ten spectrum channels, not everyone will be treated equally although all should benefit. We expect Rakuten Inc (4755 JP)  to pick up one-two bands whilst KDDI Corp (9433 JP) , NTT Docomo Inc (9437 JP) and Softbank Corp (9434 JP)  should all receive at least two.

5. Global Equity Strategy: Constructive Outlook Intact, Bottoming Process Continues

We remain constructive overall and continue to believe that global equities (MSCI ACWI) are going through a bottoming process. Opportunities exist but Sector leadership is mixed.  In our February International Strategy document, we explore various themes which lead to our overall constructive outlook, as well as a technical appraisal of each Sector and the investable opportunities therein.

In this briefing:

1. Naspers: Softbank Buyback a Guide for Naspers?
2. 🇯🇵 JAPAN: Winter Results & Revisions Scores – Market Composite & Sector Review – Chilling
3. Value-Enhancing 5G Spectrum Allocations on the Way for KDDI, DoCoMo, Softbank and Rakuten
4. Global Equity Strategy: Constructive Outlook Intact, Bottoming Process Continues
5. Repsol, Petronas & Mitsui Make Massive Gas Find in Indonesia

1. Naspers: Softbank Buyback a Guide for Naspers?

Recently, Softbank’s (9984 JP) shares jumped +18% after announcing a $5.5bn share buyback. Using Smartkarma’s holdco monitor, the discount to NAV had widened to around 55% prior to the announcement but is now sitting around 40-45%. There were a few key reasons for the buyback: (1) the Softbank Corp (9434 JP) (KK) IPO netted $20bn, giving the company the flexibility to do the buyback, and (2) Softbank is taking a more disciplined approach to further platform investments.

Both these arguments are also available to Naspers (NPN SJ) management and a move to buy back 5% of market cap is feasible and we believe would narrow the discount. The question is whether management are listening. They have been dismissive of buybacks in the past but this could change.

2. 🇯🇵 JAPAN: Winter Results & Revisions Scores – Market Composite & Sector Review – Chilling

CHILLING – A winter chill has descended over the Japanese equity market. As we covered in our Insight on market aggregate earnings Japan: Winter Results & Revisions Flash the net income of corporate Japan peaked on 26th December, However, reported earnings are a lagging indicator, and in this instance, the ‘lag’ was almost one year, with the Total Market Capitalisation (excluding REITs) peaking on 23rd January 2018. Our preferred, and often leading, indicators are the All-Market Composite Results Score – a measure of the trend and momentum in quarterly corporate earnings the All-Market Composite Forecast/Revision Score – which measures the trend and rate of change in company initial forecasts and revisions. The Results Score peaked on 1st February 2018, seven trading days after the market peak and is now one year into an extended period of decline. The Forecast/Revision Score is slowing peaked out on 27th October 2017, three months ahead of the market and the Results Score – demonstrating the reliability of company forecasts, as opposed to ‘consensus’, as a leading indicator of future earnings. Revisions have continued to ‘lead’ on the way down and 0.55 points ‘ahead’.   

TURNING NEGATIVE? – Subtracting the Forecast/Revision Score from the Results Score shows the extent of the lag in the latter. The relationship has been relatively stable of over one year; however, as we ‘roll’ into the next fiscal year’s forecasts in May, we can expect the difference to move closer to zero as both scores turn negative. As the cycle bottoms out, the revisions will recover ahead of results, and the difference will also become negative, setting the stage for the next upswing in later 2019 or early 2020.  

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 2.14 suggests we are continuing on a path to zero and below.  Failing a currency move through ¥115 (see below), the Results Score should turn negative by the time the full-year results are announced next May. We also expect a high degree of caution in forecasting, especially on the Auto sector which is overshadowed by the prospect of US tariffs. The announcement of the closer of Honda Motor (7267 JP)‘s car plant in Swindon in the UK is not a good portent.  

BEAR MARKET RALLY & THE YEN – Total Market Value has recovered by 13.8% since Christmas Day and is currently at the same level as when we published our Autumn review – SloMo Slowdown. With earnings and revisions heading lower, the implied expectation is for some or all of – a further central bank easing, a resolution of current trade tensions, and a weakening of the Yen. The last has been the ‘get-out-of-jail’ card for Japanese equities. Our chart compares the year-on-year percentage change in the US$/¥ exchange rate with a lag of six months to the Combined Results and Revision Score (with each sore being equally-weighted). The last eight turning points for the rate of change of the cross rate, have coincided with directional changes in earnings and revisions momentum. The recent weakness in the currency suggests a more stable market – at least until the late spring. 

3. Value-Enhancing 5G Spectrum Allocations on the Way for KDDI, DoCoMo, Softbank and Rakuten

The Ministry of Industry Affairs and Communications (MIC, the regulator) will allocate 2.2 GHz of new spectrum bandwidth by the end of March equal to 2.8x the existing spectrum base. This is not unexpected but we think this is a good opportunity to re-iterate some of the positive points on 5G spectrum as operators make their final applications this month and we wait for a final decision in six weeks. Importantly, with ten spectrum channels, not everyone will be treated equally although all should benefit. We expect Rakuten Inc (4755 JP)  to pick up one-two bands whilst KDDI Corp (9433 JP) , NTT Docomo Inc (9437 JP) and Softbank Corp (9434 JP)  should all receive at least two.

4. Global Equity Strategy: Constructive Outlook Intact, Bottoming Process Continues

We remain constructive overall and continue to believe that global equities (MSCI ACWI) are going through a bottoming process. Opportunities exist but Sector leadership is mixed.  In our February International Strategy document, we explore various themes which lead to our overall constructive outlook, as well as a technical appraisal of each Sector and the investable opportunities therein.

5. Repsol, Petronas & Mitsui Make Massive Gas Find in Indonesia

Repsol SA (REP SM)‘s discovery is very significant for the companies involved and others around the area, which we discuss in detail below. It is also important for Indonesia, which requires more gas to supply domestic and export demand. It is also positive for exploration sentiment globally, to see a material discovery (Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps) and this may encourage further M&A in Indonesia such as this deal: (Indonesia Upstream Gas Asset Sale: Positive Read-Through to Other SE Asia Gas Companies).

In this briefing:

1. 🇯🇵 JAPAN: Winter Results & Revisions Scores – Market Composite & Sector Review – Chilling
2. Value-Enhancing 5G Spectrum Allocations on the Way for KDDI, DoCoMo, Softbank and Rakuten
3. Global Equity Strategy: Constructive Outlook Intact, Bottoming Process Continues
4. Repsol, Petronas & Mitsui Make Massive Gas Find in Indonesia
5. What’s Down with Muji (7453 JP)?

1. 🇯🇵 JAPAN: Winter Results & Revisions Scores – Market Composite & Sector Review – Chilling

CHILLING – A winter chill has descended over the Japanese equity market. As we covered in our Insight on market aggregate earnings Japan: Winter Results & Revisions Flash the net income of corporate Japan peaked on 26th December, However, reported earnings are a lagging indicator, and in this instance, the ‘lag’ was almost one year, with the Total Market Capitalisation (excluding REITs) peaking on 23rd January 2018. Our preferred, and often leading, indicators are the All-Market Composite Results Score – a measure of the trend and momentum in quarterly corporate earnings the All-Market Composite Forecast/Revision Score – which measures the trend and rate of change in company initial forecasts and revisions. The Results Score peaked on 1st February 2018, seven trading days after the market peak and is now one year into an extended period of decline. The Forecast/Revision Score is slowing peaked out on 27th October 2017, three months ahead of the market and the Results Score – demonstrating the reliability of company forecasts, as opposed to ‘consensus’, as a leading indicator of future earnings. Revisions have continued to ‘lead’ on the way down and 0.55 points ‘ahead’.   

TURNING NEGATIVE? – Subtracting the Forecast/Revision Score from the Results Score shows the extent of the lag in the latter. The relationship has been relatively stable of over one year; however, as we ‘roll’ into the next fiscal year’s forecasts in May, we can expect the difference to move closer to zero as both scores turn negative. As the cycle bottoms out, the revisions will recover ahead of results, and the difference will also become negative, setting the stage for the next upswing in later 2019 or early 2020.  

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 2.14 suggests we are continuing on a path to zero and below.  Failing a currency move through ¥115 (see below), the Results Score should turn negative by the time the full-year results are announced next May. We also expect a high degree of caution in forecasting, especially on the Auto sector which is overshadowed by the prospect of US tariffs. The announcement of the closer of Honda Motor (7267 JP)‘s car plant in Swindon in the UK is not a good portent.  

BEAR MARKET RALLY & THE YEN – Total Market Value has recovered by 13.8% since Christmas Day and is currently at the same level as when we published our Autumn review – SloMo Slowdown. With earnings and revisions heading lower, the implied expectation is for some or all of – a further central bank easing, a resolution of current trade tensions, and a weakening of the Yen. The last has been the ‘get-out-of-jail’ card for Japanese equities. Our chart compares the year-on-year percentage change in the US$/¥ exchange rate with a lag of six months to the Combined Results and Revision Score (with each sore being equally-weighted). The last eight turning points for the rate of change of the cross rate, have coincided with directional changes in earnings and revisions momentum. The recent weakness in the currency suggests a more stable market – at least until the late spring. 

2. Value-Enhancing 5G Spectrum Allocations on the Way for KDDI, DoCoMo, Softbank and Rakuten

The Ministry of Industry Affairs and Communications (MIC, the regulator) will allocate 2.2 GHz of new spectrum bandwidth by the end of March equal to 2.8x the existing spectrum base. This is not unexpected but we think this is a good opportunity to re-iterate some of the positive points on 5G spectrum as operators make their final applications this month and we wait for a final decision in six weeks. Importantly, with ten spectrum channels, not everyone will be treated equally although all should benefit. We expect Rakuten Inc (4755 JP)  to pick up one-two bands whilst KDDI Corp (9433 JP) , NTT Docomo Inc (9437 JP) and Softbank Corp (9434 JP)  should all receive at least two.

3. Global Equity Strategy: Constructive Outlook Intact, Bottoming Process Continues

We remain constructive overall and continue to believe that global equities (MSCI ACWI) are going through a bottoming process. Opportunities exist but Sector leadership is mixed.  In our February International Strategy document, we explore various themes which lead to our overall constructive outlook, as well as a technical appraisal of each Sector and the investable opportunities therein.

4. Repsol, Petronas & Mitsui Make Massive Gas Find in Indonesia

Repsol SA (REP SM)‘s discovery is very significant for the companies involved and others around the area, which we discuss in detail below. It is also important for Indonesia, which requires more gas to supply domestic and export demand. It is also positive for exploration sentiment globally, to see a material discovery (Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps) and this may encourage further M&A in Indonesia such as this deal: (Indonesia Upstream Gas Asset Sale: Positive Read-Through to Other SE Asia Gas Companies).

5. What’s Down with Muji (7453 JP)?

Ryohin Keikaku (7453 JP) has downgraded full-year forecasts for its Muji retail chain but still expects record sales and solid profit growth in FY2018.

Overseas sales have been going from strength to strength, but previously stellar results at home have weakened, particularly in the home and accessories category which is under pressure from competitors, including even Nitori (9843 JP).

Muji is responding and also has big plans to grow food retailing, a big potential market.