Macro & Asian equity Technical Strategies, BBSP Asia

Federico D'Inca

Macro & Asian equity Technical Strategies

BBSP Asia

Technical Analysis

THE MAIN IDEA (Relative Value Approach in USD Terms) Long Term Allocation (Strategic view) Relative Value vs MXAP in USD terms ⦁ SOUTH KOREA: Strategic downgrade on Kospi from overweight to neutral ( Note that Kospi has broken key support at 270 as well.) ⦁ JAPAN: Nikkei 225 long term outperformance in progress. ⦁ HONG KONG: HSI strategic view remains "Neutral" due to mixed elements. ⦁ CHINA: HSCEI strategic view remains "Neutral", awaiting elements/signals. ⦁ AUSTRALIA: ASX 200 outperformance still valid. ⦁ TAIWAN: TWSE/MXAP in sideways/range. Neutral at the moment. ⦁ INDIA: NIFTY/MXAP shows mixed elements. Neutral India for now. Mid Term Country Allocation (Tactical view) Relative Value vs MXAP in USD terms ⦁ Downgrade Korea (KOSPI 200), Taiwan (TWSE) from “Hold” to “Decrease Exposure” as respective Ratios vs MXAP are below tactical resistances. ⦁ Maintain “Increase Exposure” for Japan (Nikkei), Australia (ASX) and still a “Hold” for Hong Kong (HSI), China (HSCEI) and India (Nifty).

THE MAIN IDEA (Relative Value Approach in USD Terms) Long Term Allocation (Strategic view) Relative Value vs MXAP in USD terms ⦁ SOUTH KOREA: Strategic downgrade on Kospi from overweight to neutral ( Note that Kospi has broken key support at 270 as well.) ⦁ JAPAN: Nikkei 225 long term outperformance in progress. ⦁ HONG KONG: HSI strategic view remains "Neutral" due to mixed elements. ⦁ CHINA: HSCEI strategic view remains "Neutral", awaiting elements/signals. ⦁ AUSTRALIA: ASX 200 outperformance still valid. ⦁ TAIWAN: TWSE/MXAP in sideways/range. Neutral at the moment. ⦁ INDIA: NIFTY/MXAP shows mixed elements. Neutral India for now. Mid Term Country Allocation (Tactical view) Relative Value vs MXAP in USD terms ⦁ Downgrade Korea (KOSPI 200), Taiwan (TWSE) from “Hold” to “Decrease Exposure” as respective Ratios vs MXAP are below tactical resistances. ⦁ Maintain “Increase Exposure” for Japan (Nikkei), Australia (ASX) and still a “Hold” for Hong Kong (HSI), China (HSCEI) and India (Nifty).

'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

LOWER LOW - Japanese equities reached a new 52-week low on 29th October but rebounded on the subsequent four trading days to close the fortnight down 2.2% - 3.6% below its 50-day moving average. From peak to trough, Total Market Value declined by 16% and 18% in Yen and US$ terms, respectively. The Value Traded Ratio spiked to its 4th-highest point this year, the number of 52-week new lows reached a two-year high and the Toraku advance-decline indicator an eighteen-month low. All of these indicators suggest that we have seen an intermediate-term market low. A longer-term signal will require confirmation from the current results announcements that earnings momentum is still positive and a degree of stability in overseas markets.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/610/original/2018-11-03_15-06-55.png?1541225537" class="editor-image img-responsive" data-smartkarma-image-id="68610"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/612/original/2018-11-03_15-17-47.png?1541225881" class="editor-image img-responsive" data-smartkarma-image-id="68612"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/619/original/2018-11-03_16-26-07.png?1541229982" class="editor-image img-responsive" data-smartkarma-image-id="68619"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/620/original/2018-11-03_15-38-35.png?1541230008" class="editor-image img-responsive" data-smartkarma-image-id="68620"></figure><div class="content-caption">Source: Japan Analytics</div>EARNINGS MOMENTUM CONTINUES TO SLOW - 37% of companies have now reported since the end of September and, in aggregate, revenues and operating profits continue to grow at a high single-digit annual pace. Quarter-on-Quarter trends in trailing-twelve-month (TTM) data are showing a declining trend with TTM QoQ operating profits showing no change. Operating margins have declined by 17 basis points since the final quarter of calendar 2017.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/632/original/2018-11-03_20-35-56.png?1541245010" class="editor-image img-responsive" data-smartkarma-image-id="68632"></figure><div class="content-caption">Source: Japan Analytics</div>ALL COMPANY PROFIT TIMELINE ► - As a result, aggregate realised TTM profits for all listed companies have yet to see the 'uplift' that has been a feature of the last seven quarters. More importantly, forecasts for the current year are largely unchanged from May when the bulk of the forecasts were released. Revisions since then have only added 0.5% and 0.9% to forecast Operating and Net Income, respectively, compared with 'uplifts' of 6.2% and 4.7% over the same period in 2017. The 3.2% gap between TTM Net Income and Forecast Net Income for six months ahead persists and provides, depending on your outlook, either 'cover' for the coming weak second half or potential for upward surprises. Our preference is for the former. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/628/original/2018-11-03_19-43-15.png?1541241826" class="editor-image img-responsive" data-smartkarma-image-id="68628"></figure><div class="content-caption">Source: Japan Analytics</div>RESULTS SCORE TIMELINE TURNS ▼- As measured by our Results Score, earnings momentum peaked on 1st February at 7.51 and has since declined 43% to 4.31, with the most significant declines being in May and October. The complimentary Forecast/Revision Score has followed a similar path to May but has since moved sideways. We anticipate further weakness in both scores. However, we expect both to remain positive for the next two quarters. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/630/original/2018-11-03_20-25-15.png?1541244334" class="editor-image img-responsive" data-smartkarma-image-id="68630"></figure><div style="text-align: center;" class="content-caption">Source: Japan Analytics </div><div style="text-align: left;" class="content-caption">NB: Results and Forecast/Revision Scores measure quarterly results, initial forecasts and any subsequent revisions for every company on a scale of +30 to -30 for 167,763 reported quarters since 2006. The Results Score covers the last eight quarters and measures quarter-on-quarter and year-on-year changes as well as the rate of change. The Forecast/Revision Score compares the initial or revised forecast with the previous forecast and the trailing-twelve-month results. Scores are aggregated based on market capitalisation into Peer Group, Sector and All Market Scores.</div>SEASONALITY - Yesterday was Culture Day in Japan, and we would refer back to our earlier insight <a href="https://www.smartkarma.com/insights/japan-seasonality-sell-in-july-and-say-goodbye-please-come-back-on-culture-day" target="_blank" data-smartkarma-citation="insights:23682">Japan: Seasonality - "Sell in July and Say Goodbye...Please Come Back on Culture Day"</a> as a reminder that the next eight months are usually the best regarding market returns, although November is normally a 'large-cap' month - small caps have declined on average.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/643/original/2018-09-05_20-00-36.png?1541286434" class="editor-image img-responsive" data-smartkarma-image-id="68643"></figure><div class="content-highlight">
OUTLOOK - With now one-third of this quarter's results and revision announcements having been made, the outlook is far more muted. Of the 1,493 results released since 22nd September, 53% have been positive in terms of Results Score and 55% regarding Revision Score. However, the average scores are now declining.  So far companies have forgone two opportunities (the Q1 and now the Q2 results) to address the 3% 'shortfall' between TTM and FY19 Forecast Net Income. Forecasts for Operating Income in six months' time are also not seeing the customary mid-year uptick. In such circumstances, the fact that the market's PER multiple is at a three-year low of 13.7x should not be considered a mitigating factor. Having broken down and out of a nine-month trading range, and as noted in more detail <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. 
SECTOR RECOMMENDATIONS - Although we maintain a cautious outlook, we will reduce our implied net short in terms of our sector selection (see below) and revert to our standard 6-long 6-short recommendations from last month's 5/9 ratio.
</div>

LOWER LOW - Japanese equities reached a new 52-week low on 29th October but rebounded on the subsequent four trading days to close the fortnight down 2.2% - 3.6% below its 50-day moving average. From peak to trough, Total Market Value declined by 16% and 18% in Yen and US$ terms, respectively. The Value Traded Ratio spiked to its 4th-highest point this year, the number of 52-week new lows reached a two-year high and the Toraku advance-decline indicator an eighteen-month low. All of these indicators suggest that we have seen an intermediate-term market low. A longer-term signal will require confirmation from the current results announcements that earnings momentum is still positive and a degree of stability in overseas markets.Source: Japan AnalyticsEARNINGS MOMENTUM CONTINUES TO SLOW - 37% of companies have now reported since the end of September and, in aggregate, revenues and operating profits continue to grow at a high single-digit annual pace. Quarter-on-Quarter trends in trailing-twelve-month (TTM) data are showing a declining trend with TTM QoQ operating profits showing no change. Operating margins have declined by 17 basis points since the final quarter of calendar 2017.Source: Japan AnalyticsALL COMPANY PROFIT TIMELINE ► - As a result, aggregate realised TTM profits for all listed companies have yet to see the 'uplift' that has been a feature of the last seven quarters. More importantly, forecasts for the current year are largely unchanged from May when the bulk of the forecasts were released. Revisions since then have only added 0.5% and 0.9% to forecast Operating and Net Income, respectively, compared with 'uplifts' of 6.2% and 4.7% over the same period in 2017. The 3.2% gap between TTM Net Income and Forecast Net Income for six months ahead persists and provides, depending on your outlook, either 'cover' for the coming weak second half or potential for upward surprises. Our preference is for the former. Source: Japan AnalyticsRESULTS SCORE TIMELINE TURNS ▼- As measured by our Results Score, earnings momentum peaked on 1st February at 7.51 and has since declined 43% to 4.31, with the most significant declines being in May and October. The complimentary Forecast/Revision Score has followed a similar path to May but has since moved sideways. We anticipate further weakness in both scores. However, we expect both to remain positive for the next two quarters. Source: Japan Analytics NB: Results and Forecast/Revision Scores measure quarterly results, initial forecasts and any subsequent revisions for every company on a scale of +30 to -30 for 167,763 reported quarters since 2006. The Results Score covers the last eight quarters and measures quarter-on-quarter and year-on-year changes as well as the rate of change. The Forecast/Revision Score compares the initial or revised forecast with the previous forecast and the trailing-twelve-month results. Scores are aggregated based on market capitalisation into Peer Group, Sector and All Market Scores.SEASONALITY - Yesterday was Culture Day in Japan, and we would refer back to our earlier insight Japan: Seasonality - "Sell in July and Say Goodbye...Please Come Back on Culture Day" as a reminder that the next eight months are usually the best regarding market returns, although November is normally a 'large-cap' month - small caps have declined on average.
OUTLOOK - With now one-third of this quarter's results and revision announcements having been made, the outlook is far more muted. Of the 1,493 results released since 22nd September, 53% have been positive in terms of Results Score and 55% regarding Revision Score. However, the average scores are now declining.  So far companies have forgone two opportunities (the Q1 and now the Q2 results) to address the 3% 'shortfall' between TTM and FY19 Forecast Net Income. Forecasts for Operating Income in six months' time are also not seeing the customary mid-year uptick. In such circumstances, the fact that the market's PER multiple is at a three-year low of 13.7x should not be considered a mitigating factor. Having broken down and out of a nine-month trading range, and as noted in more detail here, a decisive low has yet to be reached. 
SECTOR RECOMMENDATIONS - Although we maintain a cautious outlook, we will reduce our implied net short in terms of our sector selection (see below) and revert to our standard 6-long 6-short recommendations from last month's 5/9 ratio.


Japan Fortnightly Update: Lower Low as Earnings Slow

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/507/original/2018-11-02_10-20-29.png?1541121653" class="editor-image img-responsive" data-smartkarma-image-id="68507"></figure>Source: Japan Analytics
NB: companies are colour-coded by sector
</div>28 YEARS OF NON-FINANCIAL MARKET LEADERSHIP - To offer some light relief from the current market, we have compiled a graphic illustrating the evolution in the ranking of the leading non-financial Japanese companies by market capitalisation measured at the end of each of the last 28 years.METHODOLOGY - Our comments follow in the detail below, but first a few notes:-<ul>
<li>In the interests of clarity (/sanity?), financials have been omitted. Twelve of the Top 20-ranked companies in 1990 were financials. However, only <a href="https://www.smartkarma.com/entities/742" target="_blank" data-smartkarma-citation="entities:742:1">Nomura (8604 JP)</a>, <a href="https://www.smartkarma.com/entities/6483" target="_blank" data-smartkarma-citation="entities:6483:1">Aozora (8304 JP)</a> and <a href="https://www.smartkarma.com/entities/16897" target="_blank" data-smartkarma-citation="entities:16897:1">Shinsei (8303 JP)</a> have survived in their original corporate structure and have the same ticker code. Our chart would have otherwise have included the now-merged IBJ, Fuji Bank, Dai-Ichi Kangyo Bank, Mitsubishi Bank, Sakura Bank, Sumitomo Bank, Tokai Bank, Sanwa Bank and Mitsubishi Trust Bank.  Excluded from the present-day Top 20 are <a href="https://www.smartkarma.com/entities/218" target="_blank" data-smartkarma-citation="entities:218:1">Mitsubishi UFJ (8306 JP)</a>, <a href="https://www.smartkarma.com/entities/217" target="_blank" data-smartkarma-citation="entities:217:1">Sumitomo Mitsui Financial (8316 JP)</a>, <a href="https://www.smartkarma.com/entities/838" target="_blank" data-smartkarma-citation="entities:838:1">Japan Post Bank (7182 JP)</a>, <a href="https://www.smartkarma.com/entities/359" target="_blank" data-smartkarma-citation="entities:359:1">Japan Post Holdings (6178 JP)</a> and <a href="https://www.smartkarma.com/entities/219" target="_blank" data-smartkarma-citation="entities:219:1">Mizuho Financial (8411 JP)</a> from the present day.</li>
<li>Only companies that were in the Top 20 in 1990 or 2018, as well as those companies that have been in the Top 10 for at least three of the last 28 years, have been included. </li>
<li>Two companies from 1990's Top 20 - Seibu Railway and Japan Airlines - have since been delisted. Although they have relisted as <a href="https://www.smartkarma.com/entities/458" target="_blank" data-smartkarma-citation="entities:458:1">Seibu Holdings (9024 JP)</a> and <a href="https://www.smartkarma.com/entities/1184" target="_blank" data-smartkarma-citation="entities:1184:1">Japan Airlines (9201 JP)</a>, they are no longer highly-ranked.</li>
<li>Seven current Top 20 companies - (<a href="https://www.smartkarma.com/entities/315" target="_blank" data-smartkarma-citation="entities:315:1">Softbank (9984 JP)</a>, <a href="https://www.smartkarma.com/entities/1089" target="_blank" data-smartkarma-citation="entities:1089:1">NTT Docomo (9437 JP)</a>, <a href="https://www.smartkarma.com/entities/639" target="_blank" data-smartkarma-citation="entities:639:1">KDDI (9433 JP)</a>, <a href="https://www.smartkarma.com/entities/13498" target="_blank" data-smartkarma-citation="entities:13498:1">Japan Tobacco (2914 JP)</a>, <a href="https://www.smartkarma.com/entities/13520" target="_blank" data-smartkarma-citation="entities:13520:1">Central Japan Railway (9022 JP)</a>, <a href="https://www.smartkarma.com/entities/751" target="_blank" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a> and <a href="https://www.smartkarma.com/entities/15070" target="_blank" data-smartkarma-citation="entities:15070:1">Recruit (6098 JP)</a>)  - have listed during the last 28 years. </li>
</ul>THE 2050 RANKING?- Which of the current market leaders will still be in the Top 20 in 2050 in their current guise? For those still around to read this in 32 year's time, we would wager on just three - <a href="https://www.smartkarma.com/entities/3077" target="_blank" data-smartkarma-citation="entities:3077:1">Keyence (6861 JP)</a>, <a href="https://www.smartkarma.com/entities/73" target="_blank" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a> and <a href="https://www.smartkarma.com/entities/563" target="_blank" data-smartkarma-citation="entities:563:1">Sony (6758 JP)</a>.


Source: Japan Analytics
NB: companies are colour-coded by sector
28 YEARS OF NON-FINANCIAL MARKET LEADERSHIP - To offer some light relief from the current market, we have compiled a graphic illustrating the evolution in the ranking of the leading non-financial Japanese companies by market capitalisation measured at the end of each of the last 28 years.METHODOLOGY - Our comments follow in the detail below, but first a few notes:-
In the interests of clarity (/sanity?), financials have been omitted. Twelve of the Top 20-ranked companies in 1990 were financials. However, only Nomura (8604 JP), Aozora (8304 JP) and Shinsei (8303 JP) have survived in their original corporate structure and have the same ticker code. Our chart would have otherwise have included the now-merged IBJ, Fuji Bank, Dai-Ichi Kangyo Bank, Mitsubishi Bank, Sakura Bank, Sumitomo Bank, Tokai Bank, Sanwa Bank and Mitsubishi Trust Bank.  Excluded from the present-day Top 20 are Mitsubishi UFJ (8306 JP), Sumitomo Mitsui Financial (8316 JP), Japan Post Bank (7182 JP), Japan Post Holdings (6178 JP) and Mizuho Financial (8411 JP) from the present day.
Only companies that were in the Top 20 in 1990 or 2018, as well as those companies that have been in the Top 10 for at least three of the last 28 years, have been included. 
Two companies from 1990's Top 20 - Seibu Railway and Japan Airlines - have since been delisted. Although they have relisted as Seibu Holdings (9024 JP) and Japan Airlines (9201 JP), they are no longer highly-ranked.
Seven current Top 20 companies - (Softbank (9984 JP), NTT Docomo (9437 JP), KDDI (9433 JP), Japan Tobacco (2914 JP), Central Japan Railway (9022 JP), Fast Retailing (9983 JP) and Recruit (6098 JP))  - have listed during the last 28 years. 
THE 2050 RANKING?- Which of the current market leaders will still be in the Top 20 in 2050 in their current guise? For those still around to read this in 32 year's time, we would wager on just three - Keyence (6861 JP), Toyota Motor (7203 JP) and Sony (6758 JP). 

Japan: The Evolution Of (Non-Financial) Market Leadership

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

Japan Tobacco, Inc. operates as an tobacco product company. The Company manufactures, markets and sells cigarettes and other tobacco products internationally. Japan Tobacco is also engaged in pharmaceutical and food businesses.

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Japan Tobacco (2914 JP)

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