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WeekWatch (28/10/2019)

WeekWatch (28/10/2019)

Emperor Jimmu is said to have taken his place on the Chrysanthemum Throne as Japan’s first emperor back in 660 BC – well, give or take. Last week, amid the excitement of the Rugby World Cup, the 126th emperor formally proclaimed his own ascension to the throne.

In the same week, the Nikkei index struck a record high for the year, helped by high 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 broader trends, and Japan’s ongoing spat (over history) with South Korea is clearly costing both sides. Last week a meeting of the country’s two (executive) leaders signalled a thaw while, in a further sign of regional rapprochement, Japan conducted its first joint naval exercise with China in eight years.

Resolving the US–China trade war may prove somewhat harder but is no less 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 sensitive to trade wars across the Pacific and the East China Sea – indeed, Japan plc has already felt the heat.

“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,” said Yoshihito Ito of Nippon Value Investors, manager of the St. James’s Place Japan fund. “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,” said Ito.

All the same, 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 smell of protectionism. Yet the TOPIX has risen by some 12% this year and the economy is still growing.

Yet for WeWork, which has been the subject of a stream of negative headlines, Japan plc might just prove its saviour; last week, the stricken shared workspace giant accepted a rescue deal by SoftBank, taking the latter’s stake from 30% to 80%.

Third-quarter results have begun to drip in from major US companies, too. Boeing saw its profits nosedive, with revenues down a fifth, following the grounding of its 737 MAX jet liner. Amazon and

AB InBev, the drinks major, were also disappointments. 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.

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.

Not to be outdone, the UK generated political heat of its own. Boris Johnson achieved the not inconsiderable feat of winning a vote on his Brexit deal in the Commons by 30 votes, meaning he has already progressed further than Theresa May ever managed. His tight timetable, however – allowing three days to scrutinise the legislation – was too much for parliament to swallow, thereby forcing him to drop his “do or die” 31 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 31January, but the prime minister may struggle to get the necessary two-thirds majority to change the Fixed-term Parliaments Act. Labour prevaricated, ostensibly 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 prime minister 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 – surely a gift for headline writers across the land.

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

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

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