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

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

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

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14566/SC/NR/IPJ std UK/Jul17

Japan – Making sense of the cyclical and the structural

Webcall November 2017 Paul Chesson Head of Japanese Equities

This presentation is for Professional Clients

  • nly and is not for consumer use.
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  • 1. The Background

Making sense of the cyclical and the structural

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14566/SC/NR/IPJ std UK/Jul17

Japan: Machine tool orders

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Source: SMBC Nikko/Japan Machine Tool Builders Association as at 30 September 2017.

  • 50%
  • 30%
  • 10%

10% 30% 50% 70% 12 13 14 15 16 Yoy change Domestic Foreign Total Machine tool orders

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14566/SC/NR/IPJ std UK/Jul17

Capital expenditure

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Source: Development Bank of Japan; survey date of June 2017.

Historical capital spending by investment motive (manufacturing)

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Japan: Pre-tax profit growth

5

Source: MUMSS, from Nikkei Bulk, and Toyo Keizai Japan Company Handbook data as of 2 October 2017. Note: Figures cover TSE1 firms (ex. financials) with March FY-ends. Excludes sales and OP at wholesale trade companies. Estimates FY12 onward are based on companies or Toyo Keizai estimates, whichever are newer.

2 4 6 8 10 12 14 FY3/15 FY3/16 FY3/17 est. FY3/18 est. Recurring profits - All industries, yoy %

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14566/SC/NR/IPJ std UK/Jul17

90 100 110 120 130 140 150 160 50 60 70 80 90 100 110 120 130 12 13 14 15 16 17 TOPIX EPS (lhs) JPY - TWI Index Spot Index (mid price), rhs

Japanese profits are very sensitive to the Yen

6

Source: Bloomberg, SMBC Nikko as at 22 September 2017. Note: EPS forecast is 12-month forward IBES consensus Sources: Thomson Reuters Datastream, SMBC NIKKO.

Topix EPS and Trade-weighted Yen

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What about monetary policy? 3 measures of inflation

7

Source: Mitsubishi as at 11 October 2017. Data to 31 August 2017 (latest available).

  • 2.0
  • 1.5
  • 1.0
  • 0.5

0.0 0.5 1.0 1.5 2.0 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Headline CPI CPI ex-food CPI ex-food and energy CPI, %

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Wage growth is lagging the tightness of the labour market

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Source: Credit Suisse as at 11 October 2017. Data to 31 August 2017 (latest available).

  • 3.0%
  • 1.0%

1.0% 3.0% 5.0% 7.0% 9.0% 0.4 0.6 0.8 1.0 1.2 1.4 1.6 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Japan ratio of job offers to applicant Japan average hourly cash earnings, y/y 6mma (rhs)

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Part time wages growing more quickly than full time wages

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Source: Barclays Research, Instant Insights as at 6 October 2017.

  • 1.5
  • 1.0
  • 0.5

0.0 0.5 1.0 1.5 2.0 2.5 Jan 10 Jan 12 Jan 14 Jan 16 Total Full-timers Part-timers Hourly scheduled pay, % yoy

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14566/SC/NR/IPJ std UK/Jul17

Japan: Corporate cash

10

Source: Goldman Sachs as at 11 October 2017. Data to 30 September 2017.

25 30 35 40 45 50 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 TOPIX S&P500 STOXX600 Cash holdings vs. interest-bearing debt, excludes financials, %

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Total shareholder returns from Japanese companies

11

Source: Nomura data and estimates as at 11 October 2017. Universe is all listed Japanese companies.

2 4 6 8 10 12 14 16 18 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E Dividends Share buybacks Yen, trillion

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Different views about Japanese corporate cash

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Source: Mizuho Securities Equity Research based on Life Insurance Association of Japan as at 23 March 2017.

10 20 30 40 50 60 70 80 90 Have more than enough Just about right Not enough Companies Investors %

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Making sense of the cyclical and the structural

  • 2. Our strategy
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Japan: Forward PE ratios

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Source: HSBC as at 31 August 2017. Japanese universe - all Japanese stocks with minimum market cap of USD 500mn and at least three FY1/FY2 EPS estimates. The universe is rebalanced annually on December 31 of each year. Macro-cyclical and macro-defensive stocks are the top decile (upper 10%) of our macro correlation rankings, also conducted on December 31 of each year.

0.0x 5.0x 10.0x 15.0x 20.0x 25.0x 30.0x 35.0x 40.0x Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Japan Universe >USD 500mn Macro-Cyclicals Macro-Defensives 12m forward PE, x

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Japan: Earnings revisions

15

Source: HSBC as at 31 August 2017. Japanese universe - all Japanese stocks with minimum market cap of USD 500mn and at least three FY1/FY2 EPS estimates. The universe is rebalanced annually on December 31 of each year. Macro-cyclical and macro-defensive stocks are the top decile (upper 10%) of our macro correlation rankings, also conducted on December 31 of each year.

  • 0.80
  • 0.60
  • 0.40
  • 0.20

0.00 0.20 0.40 0.60 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Earnings revision ratio Japan Universe >USD 500mn Macro-Cyclicals Macro-Defensives

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Invesco Perpetual Japan Fund Most active sectors

16 Top 5 overweights Fund % Index %1 Active % Banks 18.42 7.61 10.80 Transportation Equipment 15.56 8.94 6.63 Mining 6.90 0.33 6.57 Real Estate 8.72 2.30 6.42 Iron & Steel 7.03 1.22 5.81 Top 5 underweights Fund % Index %1 Active % Information & Communication 1.58 7.79

  • 6.21

Chemicals 1.20 7.09

  • 5.89

Wholesale Trade 0.00 4.58

  • 4.58

Land Transportation 0.00 4.03

  • 4.03

Electric Appliances 9.93 13.41

  • 3.48

Source: Invesco as at 30 September 2017. 1 Reference Index: Topix first section.

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Japanese banks: Comparison of valuations

17 PER FY17E PBR FY16A ROE (%) FY16A Div.Yield (%) FY16A Japan MUFG 9.8 0.6 7.7 2.5 SMFG 9.4 0.6 10.3 3.7 US Bank of America 14.4 1.1 6.7 1.0 Citigroup 14.5 1.0 6.6 0.6 Europe HSBC 14.2 1.2 1.1 5.2 Banco Santander 12.6 0.9 6.9 3.6

Source: Deutsche Bank Group as at 29 September 2017. For Japanese Banks, FY16=FY3/17 and FY17=FY3/18. For illustrative purposes only.

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Relative performance of bank shares vs UST 10Y

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Source: Deutsche Bank as at 27 September 2017,

1.20 1.40 1.60 1.80 2.00 2.20 2.40 2.60 2.80 60 70 80 90 100 110 120 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Performance of bank shares relative to market (LHS) UST 10Y (%, RHS) Relative performance of bank shares vs UST 10Y

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Toyota

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

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Source: Toyota, Deutsche Bank as at September 2017.

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Toyota share price

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Source: Bloomberg as at 11 October 2017. For illustrative purposes only.

60 70 80 90 100 110 120 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Toyota share price Jan 2015 = 100

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Inpex

▪ Japan’s largest E&P oil and gas miner ▪ Most significant asset is the Ichthys LNG field in Australia, which is scheduled to begin producing in 2018, adding significant growth to sales and profits. 75% of output already under long term contract ▪ Consensus EPS forecast go from Y31 for 03/17 to Y38 for 03/18, Y57 for 03/19 (source: Bloomberg as at 11/10/17) ▪ Company’s investment phase in Ichthys nearly over, improving cash flow should mean higher dividends, PBR 0.5x, DY 1.5 (source: Bloomberg as at 11/10/17)

21

Source: Invesco Perpetual as at October 2017 unless otherwise stated. For illustrative purposes only.

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14566/SC/NR/IPJ std UK/Jul17

Inpex share price

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Source: Bloomberg as at 11 October 2017. For illustrative purposes only.

40 50 60 70 80 90 100 110 120 130 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Price Jan 2015 = 100

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14566/SC/NR/IPJ std UK/Jul17

Invesco Perpetual Japan Fund Top ten active sectors

23 Top 10 Fund % Index %1 Active % Banks 18.42 7.61 10.80 Transportation Equipment 15.56 8.94 6.63 Mining 6.90 0.33 6.57 Real Estate 8.72 2.30 6.42 Iron & Steel 7.03 1.22 5.81 Machinery 9.45 5.38 4.07 Rubber Products 2.31 1.01 1.30 Insurance 3.64 2.34 1.30 Oil & Coal Products 1.37 0.57 0.80 Services 4.18 4.11 0.07

Source: Invesco Perpetual as at 30 September 2017. 1 Reference Index: Topix first section.

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Invesco Perpetual Japan Fund Bottom ten active sectors

24 Bottom 10 Fund % Index %1 Active % Information & Communication 1.58 7.79

  • 6.21

Chemicals 1.20 7.09

  • 5.89

Wholesale Trade 0.00 4.58

  • 4.58

Land Transportation 0.00 4.03

  • 4.03

Electric Appliances 9.93 13.41

  • 3.48

Construction 0.00 3.27

  • 3.27

Pharmaceutical 1.49 4.50

  • 3.01

Other Products 0.00 2.18

  • 2.18

Foods 2.68 4.42

  • 1.73

Electric Power & Gas 0.00 1.66

  • 1.66

Source: Invesco Perpetual as at 30 September 2017. 1 Reference Index: Topix first section.

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Invesco Perpetual Japan Fund Top ten holdings

25 Top 10 Fund % Index1 % INPEX 6.90 0.29 Mitsubishi UFJ Financial 6.45 2.22 Honda Motor 6.39 1.23 Toyota Motor 6.12 3.35 Sumitomo Mitsui Financial 5.81 1.40 CASIO 4.20 0.05 Mizuho 4.16 1.08 Hitachi Metals 4.09 0.07 NTT Urban Development 3.91 0.03 Murata Manufacturing 3.65 0.71

Source: Invesco Perpetual as at 30 September 2017. 1 Reference Index: Topix first section

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Invesco Perpetual Japan Fund Net performance (%)

26 Calendar year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 IP Japan Fund

  • 5.57
  • 1.26

24.44 13.75

  • 25.11

11.49 32.01

  • 2.34

15.88 26.03 IA Japan

  • 10.80
  • 2.47
  • 5.16

19.19

  • 11.35

3.40 26.31 0.62 15.84 23.58 Quartile 1 2 1 4 4 1 1 4 2 1

Source: Lipper as at 30 September 2017. Fund performance figures are based on the Z (accumulation) share class. As this was launched on 12 November 2012, for the periods prior to this launch date, performance figures are based on the accumulation share class, without any adjustment for fees. Performance figures for all share classes can be found in the relevant Key Investor Information Document. Fund performance figures are shown in GBP, inclusive of reinvested income and net of the Ongoing Charge and portfolio transaction costs. The figures do not reflect the entry charge paid by individual investors. Sector average performance is calculated on an equivalent basis. Index: Total Return, in GBP.

Cumulative returns YTD 1 year 3 years 5 years 10 years IP Japan Fund 3.44 12.20 51.24 132.09 128.56 IA Japan 8.62 13.79 59.96 107.41 89.44 Quartile 4 3 3 1 2 Past performance is not a guide to future returns.

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14566/SC/NR/IPJ std UK/Jul17

Important information

This presentation is for Professional Clients only and is not for consumer use. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Past performance is not a guide to future returns. Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security

  • r strategy. Regulatory requirements that require impartiality of

investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before

  • publication. The information provided is for illustrative purposes
  • nly, it should not be relied upon as recommendations to buy
  • r sell securities.

The fund may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of the Fund. The Manager, however, will ensure that the use of derivatives within the Fund does not materially alter the overall risk profile of the Fund. For the most up to date information on our funds, please refer to the relevant fund and share class-specific Key Investor Information Documents, the Supplementary Information Document, the Annual or Interim Reports and the Prospectus, which are available using the contact details shown. 27

Invesco Perpetual is a business name of Invesco Fund Managers Limited and Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley on Thames, Oxfordshire RG9 1HH Website: www.invescoperpetual.co.uk Authorised and regulated by the Financial Conduct Authority