WeeklyWatch – Japan balances rugby success with external pressures

28 October 2019

Stock Take

New Japanese emperor takes the throne amid rugby excitement

Japan’s first emperor, Emperor Jimmu, is said to have taken his place on the Chrysanthemum Throne circa. 660 BC. Last week his 126th successor, Emperor Naruhito, formally proclaimed his own ascension to power (although a celebration parade has been postponed out of respect for the victims of Typhoon Hagibis).

Emperor Naruhito officially began his reign amid the spectacle of the Rugby World Cup, which has been a huge success – with sellout games, global coverage and incredible fan engagement across the world…not to mention the home team defying the odds to reach the quarter-finals for the first time in history! Chief Executive of World Rugby Brett Gosper has also predicted that the event will bring in a commercial revenue of US$449 million – US$38 million more than the record-breaking 2015 tournament held in England.

In the same week that Emperor Naruhito took his place, the Nikkei index struck a record high for the year, helped by hopes for tech companies’ earnings, and by a fall for the yen against the dollar. That fall benefited the share prices of several major exporters, among them Toyota and Komatsu.

Nevertheless, short-term currency swings matter less than the bigger picture, and Japan’s ongoing quarrel (over history) with South Korea is clearly costing both sides. Last week a meeting of the country’s two executive leaders signalled a thaw in hostilities, while Japan also conducted its first joint naval exercise with China in eight years – a further sign of regional reconciliation.

Technology companies prove sensitive to the trade war

Resolving the US-China trade war may prove a more difficult task, but it is still a concern for Tokyo – at the end of August, Japan’s Cabinet Office said the US-China issue was the biggest threat to global growth. Technology supply chains may be particularly susceptible to trade wars across the Pacific and the East China Sea. Indeed, Japan plc has already felt the heat.

Yoshihito Ito of Nippon Value Investors, Manager of the St. James’s Place Japan fund, commented:

“Currently, forecasted earnings of the Tokyo Stock Exchange-listed companies for the financial year to March are slightly higher than in the previous financial year. This relatively weak earnings forecast is partly due to the prolonged US-China trade issues.

“On the other hand, the negative impact of Japan’s consumption tax rate hike from 8 to 10% at the beginning of October seems to be limited, and retail stocks have performed relatively strongly since then. The Japanese equity market as a whole offers a relatively attractive valuation, especially considering the fact that Japan enjoys political stability.”

That said, some investors are nervous. Inflation in Japan has dropped to a worryingly low 0.2%, the central bank has used much of its ammo, and new listing rules hint at protectionism. Yet the TOPIX has risen by some 12% this year and the economy is still growing. However, for WeWork – the stricken shared workspace giant that has been the subject of a stream of negative headlines – Japan plc might just prove its saviour; last week, WeWork accepted a rescue deal by SoftBank, taking the latter’s stake from 30% to 80%.

Third-quarter results start to arrive from major US companies

Last week saw US companies start to report on the third-quarter. Boeing saw profits nosedive, with revenues down a fifth, following the grounding of its 737 MAX jet liner. PayPal and Microsoft’s happier news, however, reflected the broader earnings trend and the S&P 500 finished the week up. Mainland Chinese stocks also rose, helped by public comments made by China’s deputy foreign minister, who said that US-China trade talks were progressing nicely.

The US under oath

It was an extraordinary week in the US: in private testimony, the former US ambassador to Ukraine said US military aid to the country had explicitly been withheld until Ukraine agreed to investigate the business practices of the family of Joe Biden; and Republicans stormed the committee rooms where the impeachment investigation was being conducted.

Furthermore, Mark Zuckerberg was grilled in Congress over Facebook’s political ads and vetting policies; and in New York State, the attorney general brought a lawsuit against ExxonMobil for supposed dodgy climate change accounting and defrauding investors.

Boris reaches new Brexit milestone

Not to be outshone, the UK generated a political storm of its own. Prime Minister Boris Johnson achieved the feat of winning a vote on his Brexit deal in the Commons by 30 votes, meaning he has progressed further than his predecessor Theresa May. His proposition of a mere three days to examine the legislation, however, was a step too far for parliament, thereby forcing him to drop his “do or die” 31st October exit deadline.

The Prime Minister’s response was to pull the next vote and plan for a December general election should the EU offer an extension to January. The EU has since offered a ‘flextension’ up to 31st January, but the Prime Minister may struggle to get the necessary two-thirds majority to change the Fixed-term Parliaments Act. Labour prevaricated, supposedly over preventing a no-deal Brexit, although much expert opinion suggests this is technically impossible in the long run without revoking Article 50. Into the breach stepped the Liberal Democrats and Scottish National Party, offering the PM an alternative route to an election – he may yet be tempted to take it up.

A Christmas election carries its own particular risks – for one thing, many of the usual venues are already booked for Christmas parties and…pantomimes! (A gift for headline writers!)

Wealth Check

According to recent data from HMRC, pensions tax relief will cost the government £40 billion this year.

Income Tax relief on pension contributions is forecast to cost £21.2 billion in 2019/20, up 4% from the previous year. This covers net relief including relief on contributions, relief on investment returns, and tax paid in retirement. National Insurance tax relief for employers and employees on their pension contributions will cost £18.7 billion, up 7% from 2018/19.1

Long term this shows the growing cost of subsidising retirement saving, but in the short term it is good news for the individual, as it means that some of your money that would have gone to the government as tax goes into your pension instead. Over a lifetime of saving, it can provide a significant boost to your savings and help you achieve a better standard of living.

Such a boost is not to be sniffed at – the Pensions and Lifetime Savings Association (PLSA) recently worked out that a single person will need an income of £33,000 a year for a comfortable retirement, equating to a pension pot worth at least £587,116.

1 HMRC Estimated Costs of Tax Reliefs, October 2019

In the Picture

Third quarter earning season is well under way, with some of the big hitters already reporting. Mideast oil producer Saudi Aramco, the world’s largest company, remains unlisted for the moment, but Riyadh pledged earlier this month that the initial public offering will take place “very, very soon”.

The Last Word

The times ahead will not be easy. We are coming back!

Alberto Fernández, who won Sunday’s presidential election in Argentina

The information contained is correct as at the date of the article.

Nippon Value Investors is a fund manager for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

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