What Worked Japan - 10 Mar 2017 - Only Quality factors slighty stood out this week

What Worked

Low Debt to Equity and high ROIC were the only factors that did well this week. Low Debt to Equity names that outperformed were Cyber Agent (4751) up 9%, COLORP (3668) up 8% and HIROSE ELECTRIC (6806) up 7%. High ROIC names that also did well were Idemitsu Kosan (5019) up 6%, Kissei Pharma (4547) up 6% and Coca-cola East Japan (2580) up 6%. All the other factors were basically significant this week.

Who Moved

Only 15 names moved on volume this week. On the positive side, Temp Holdings (2181) is up 5%, Nipro Corp (8086) is up 5% and Pigeon Corp (7956) is up 4%. On the other side, NEXON (3659) is down 7%, Isetan Mitsukoshi Holdings (3099) is down 6% and Nippon Light Metal Holdings (5703) is down 5%.

Summary

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What Worked Australia - 10 Mar 2017 - Both Value and Growth off, ROE Positive

What Worked

In an odd week both Value and Growth metrics came off this week. Value, except for Dividend yield, has seen a lot of low PE names hit hard over the last couple of weeks, all in stark contrast to the excellent run over the previous 3 months. Cheap names on a forward PER basis that came off this week were also the ones that were hurt last week, and as with last week the more expensive names tended to remain in line with the market, while the cheaper ones came off sharply again. The Resources names were among the most impacted this week, and continue to get cheaper on a forward PER basis, namely Whitehaven Coal (WHC, -7.3%), Saracen Mineral Holdings (SAR, -10.8%) and Northern Star Resources (NST, -5.2%).

Names ranking highly in terms of forward OP growth were also hit this week, and once again the focus was on Resources. Iluka Resources (ILU, -3.6%), Whitehaven Coal (WHC, -7.3%) and BHP Billiton (BHP, -5.4%) are all among the names with the highest forecast OP growth, and all among the hardest hit this week. On the positive side of things, ROE did see positive numbers in terms of Rank IC, yet this was in large part driven by the middle ground rather than the top and tail of the market. Both the top and bottom quintile of ROE names were off against the benchmark this week.

Who Moved

Only 14 names managed to move on significant volume this week, a small downtick from the previous weeks that have seen a lot of names moving around backed by volume. On the losing side of the market Resolute Mining (RSG, -9.2%), OZ Minerals (OZL, -7.6%) and Evolution Mining (EVN, -6.1%) filled the bottom three positions, while Qube Holdings (QUB, +6.9%), Costa Group Holdings (CGC, +4.4%) and Breville Group (BRG, +2.3%) all finished the week in the black and above the benchmark.

Summary

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What Worked Asia - 03 Mar 2017 - Large cap names were hurt in China / India, Value did well in South Korea

What Worked

Pretty good selloff in large-cap names in China this week. China Hongqiao Group is down 11% and China Eastern Airlines is down 7%. In Hong Kong while none of the other factors stood out, high ROIC names did well this week. Luen Wong Group is up 34% and Wang On Properties is up 19%. Value and high Beta names did well in South Korea. Low PBR names that did well this week were Hyundai Mipo Dockyard up 11% and Hyundai Heavy Industries up 8%.

In Singapore there was a slight selloff in high Beta names and a move into high ROE names. Yangzijiang Shipbuilding is up 18% and Jardine Cycle & Carriage is up 9%. High Dividend names did well in the Philippines this week. Belle Corp is up 4% and Semirara Mining % Power is up 4%. Nothing really stood out in India. In Malaysia there was a slight move into large-cap and growth names. My E.G. Services is up 8% and Press Metal is up 9%.

Who Moved

188 names moved on volume this week. A good portion of the volume spikes came in the Process Industries and Financial Sector. At the country level, half of the volume spikes came in China/HK and India. On the positive side, Gallant Venture is up 41%, Sri Rejeki Isman is up 33% and China Zhengtong Auto Service is up 30%. On the other side, Season Pacific Holdings is down 19%, Bharat Petroleum Corp is down 13% and Hindustan Petroleum is down 10%. All moved on volume.

Summary

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What Worked Japan - 03 Mar 2017 - Value did not work for the first time since last December

What Worked

Value, particularly PBR, was hurt this week. This is really the first week since last December that low PBR names have not done well. Low PBR names that were down included Ogaki Kyoritsu Bank (8361) down 10%, Showa Denko (4004) down 8% and Inpex (1605) down 5%.

High Beta names were also down this week. As with Value, this is the first week this year that high Beta names were hurt. Toshiba (6502) is down 5%, Taiyo Yuden (6976) is down 5% and Ibiden (4062) is also down 5%. With Value and Beta down, there was a slight move into high ROIC names. Morinaga (2201) is up 7%, Unipres Corp (5949) is up 6% and Nippon Paint Holdings (4612) is up 6%.

Who Moved

Only 25 names moved on volume this week. On the positive side, Mitsui Mining and Smelting (5706) is up 11%, Morinaga (2201) is up 7% and Morinaga Milk Industry is up 6%. On the other side, Ogaki Kyoritsu Bank (8361) is down 10%, Pola Orbis Holdings (4927) is down 7% and Park24 (4666) is down 6%.

Summary

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What Worked Australia - 03 Mar 2017 - PE comes off, and drags low beta names along with it

What Worked

PER finally took a week off, and came in quite negative this week with a very large down-swing in the cheapest names in the market. The lowest PER names (i.e. highest earnings yield) dropped almost -4% against the benchmark, while the more expensive names remained relatively flat. Some of the worst hit included Resolute Mining (RSG, -15.9%), Spotless Group Holdings (SPO, -14.4%) and Retail Food Group Limited (RFG, -10.6%). While 12 month momentum appeared to show positive results this week, the top and tail of 12 month momentum names both lost out to the benchmark, and the IC was in large part driven by middle three quintiles. 12 month momentum, either if you are for or against it, is not playing nicely for anyone focusing on this signal, and has not been a team player for close to three months.

Beta was a good mover this week, however like 12 month momentum, the IC was largely driven by the middle ground. That being said, low Beta names took a big hit this week, with the sharp drop in the last quintile (lowest beta) names looking about a sharp as drop in low PE names. Newcrest Mining (NCM, -7.6%), St. Barbara Limited (SBM, -7.4%) and Macquarie Atlas Roads (MQA, -1.8%) are among the lowest Beta names in the Australian market, and all off this week. On the other side, high beta names as a group also dropped against the benchmark, albeit not as heavily.

Who Moved

Volumes are still looking strong with 42 names from the benchmark moving this week on higher than normal volumes. Among the winners, Worelyparsons (WOR, +29.7%), Breville Group (BRG, +11.7%) and South32 Limited (S32, +10.6%) all finished the week higher with higher than normal volumes. On the other side, Orocobre (ORE, -17.6%), Healthscope Limited (HSO, -3.9%), Harvey Norman Holdings (HVN, -3.8%) and Cromwell Property Group (CMW, -3.5%) all ended weaker.

Please take a look and let me know if we can do anything else.

Summary

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What Worked Asia - 24 Feb 2017 - Low PBR and short-term momentum names did well this week in Asia

What Worked

Value and high Beta names dominated in China this week. Both PBR and Beta were the strongest factors in China over the last month. Low PBR names that did well were Greenland Hong Kong up 12% and Sunac China Holdings up 9%. As with China, low PBR names continue to do well in Hong Kong. In Hong Kong, PBR is the strongest factor over the last 3 months. HNA Holdings Group is up 22% and Esprit Holding is up 19%.

High dividend yield names did well in Singapore this week. Sembcorp Marine is up 12%. In South Korea, Value and high Beta names were hurt this week. ViroMed is down 8% and LG International is down 6%. Large-cap names dominated in Indonesia. Bank Rakya Indonesia Agroniaga is up 18% and Indo Tambangraya Megah is up 13%. In the Philippines, positive momentum names did very well this week. Premium Leisure is up 11% and Belle Corp is up 5%.

Who Moved

291 names moved on volume this week. A good number of the names came in the Financial and Electronic Technology sector.  At the country level, HK/China made up one third of the volume spikes. On the positive side, Jindal Steel and Power is up 26%, HNA Holding Group is up 22% and AEON (Malaysia) is up 24%. On the other side, Sun Art Retail is down 19%, GeniuS Electronic Optical is down 13% and Season Pacific Holdings is down 13%.

Summary

Asia ex Japan Factor Performance

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Chart of the Day: JPY Forecast Model in the Money

The Model

Custom Products Research uses 5 regression models to forecast fair value for the USDJPY exchange rate. As of January 25, 2017 the fair value for USDJPY was ¥112.65, based on our main 3-Equation model (3EQ).  We had also forecast ¥114.51 based on the US-Japan 2-Yr 1 YR forward spread differential (2Y1YF) and ¥111.03 based on the inflation expectation-adjusted 2 YR US-Japan real rate spreads (IA2YS). The 5 regression models all have very high R2 with the 3 equation model at 89%, R= .944 and t-stat 121 over the last 7 years.  The inflation expectation adjusted 2 yr yield gap R2 is 90.8% over 5 years, R95% and t-stat 60.2. While the 2-Yr 1 YR forward spread has an R2 of 87% and R93% with t-stat 25.7 over last 2 years, but this falls over a longer timeframe. (for further details see January 31 report, ‘Exchange Rate Forecast…..’)

As of 1AM GMT February 24, 2017,  both  2Y1YF and 1A2YS indicated USDJPY fair value ¥112.90, which happened to be exactly the spot rate. While our 3-equation model stood at ¥111.92.

What has Changed?

Over the last month, 2-Yr yield spreads have remained unchanged at 145bps, while 2 and 3-YR inflation adjusted spreads have become more negative (-60bps to -100bps), implying a stronger Yen. Real adjusted 10-Yr rate spreads have also declined, from 0.6% to 0.09%, also implying a stronger Yen. Meanwhile inflation expectation-adjusted short-term yields have been flat. Similarly, the 2 YR 1-YR Forward rate differential has been flat at 1.9%, after having risen from 1.4% in October. 

The Outlook

We still expect the Yen to weaken towards year end, based on 4 quarter-point hikes by the Fed. (see January 1 report ‘Central Bank Policy: Fed Still Behind the Curve). Q1 GDP growth should be between 2.4-2.5%, Hourly wage growth is also 2.5% and the Bloomberg Economic Diffusion Index continues at a high level. January CPI was 2.3%, with continued upward pressure from oil and China producer pricing, supporting our ‘inflation surprise shock’ scenario. 

Unfortunately, as the BOJ is content with 1% real GDP growth and USDJPY above ¥110, no further rate cuts are expected from the BOJ (see February 17, 2017 report ‘Central Bank Policy – Why 2018 is Looking a Lot Like 2006 for the BOJ’)

For more details, or to get access to the model please Contact Us


What Worked Japan - 24 Feb 2017 - Most factors insignificant, short-term momentum names hurt

What Worked

Interesting week. With TOPIX basically flat, none of the Value or Growth factors stood out this week. There was a slight selloff in high ROIC names. Nissan Chemical Industries (4021) was down 7%, Tokuyama Corp (4043) was down 6% and Taiheiyo Cement Corp (5233) was down 6%.

Momentum, particularly short-term momentum, names also did not do well this week. Daifuku (6383) was down 4%, Mitsui Mining and Smelting (5706) was down 5% and Daido Steel (5471) was down 4%. All other factors were insignificant this week.

Who Moved

42 names moved on volume this week. The volume spikes look to be spread across all sectors. On the positive side, Toyo Tire & Rubber is up 25%, Mitsui Mining and Smelting is up 19% and MinebeaMitsumi is up 19%. On the other side, Iida Group (3291)is down 11%, Nikon is down 10% and Asics Corp (7936) is down 9%.

Summary

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What Worked Australia - 24 Feb 2017 - Dividends strong with ROIC, 12M Momentum still off

What Worked

While Trailing PER managed to stay in the positive this week, Forward PER just ticked over into the positive, but still provided +2.5% on a long/short basis, compared to the market being down -1.2%. Looking at the individual quintiles for forward PER, the top and bottom went in the direction a value investor would hope they would – cheaper names going up, more expensive names down. The lack of IC strength this week was primarily driven by the middle ground of PER, throwing off the correlations. At midday today, there was not a lot of factor driven direction in the market, however a pick up into the end of the day saw the emergence of some clarity.

Forward Dividend Yield and ROIC (Trailing PER just made it…) were the only signal this week to push into our “worth looking at” territory of ±10.0%. It was a pretty even-sided bet this week in the Dividend yield space, with lower yielding names under-performing almost as much as the higher yielding names out-performed. Higher yielding names doing well this week included Nine Entertainment (NEC, +6.2%), Crown Resorts (CWN, +6.7%) and Asaleo Care (AHY, +10.4%). Lower yielding names were punished, among them Aconex (ACX, -10.8%), Australian Agricultural Company (AAC, -3.3%) and Galaxy Resources (GXY, -3.7%). The numbers for ROIC were being largely driven by the middle ground, although the top and tail did show an uptick in the higher return names, it was the low ROIC names that really drove the numbers.

Who Moved

Volumes still getting stronger around reporting in the Aussie market, with 36 names from the benchmark moving on significantly higher than normal volumes. Those closing the week lower included iSentia Group (ISD, -39.9%), Ardent Leisure Group (AAD, -22.8%) and WorleyParsons (WOR, -18.7%). On the other side, Seven Group Holdings (SVW, +10.4%), Monadelphous Group (MND, +10.0%) and Tassal Group (TGR, +9.5%) all finished the week in the positive and well outperforming the index.

Please take a look and let me know if we can do anything else.

Summary

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Exchange Rate Forecast - USDJPY Fundamental Drivers, Technicals & Dervatives

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Looking Back at 2016

At the beginning of 2016, Custom Products forecast USDJPY of between ¥109.0 (2 equation model) and ¥114.4 (3 equation model) by December 31, 2016 (Compared to ¥120.2 at the beginning of 2016).  Our forecast differed from actual year-end USDJPY  ¥116.96 due to: 1) we had expected 2 quarter-point hikes from the FRB instead of only one, 2) we had expected the BOJ to cut its policy rate on deposits further from -0.1% to   -0.3% by December, 3) the Brexit shock which caused the GBP to depreciate 16.5% against the dollar lead to a ¥3.8 appreciation (3.45%) of the yen and 4) oil prices closed the year at $53/bbl  (10% higher than our forecast adding 1.35% to yen appreciation). Having said this, based on our 2 and 3 equation models; we would have expected the USDJPY to end 2016 between 106.7 and 113.4 with perfect hindsight.

Why has the Dollar Strengthened Since the US Election?

Since the US election, the yen has weakened from ¥104.5 to ¥115 (overshooting to 118.6). This is best understood in terms of

  1. Short-term rates,
  2. Growth expectations, and
  3. Inflation expectations.

Clearly the path for US rates has been ratcheted up since the US election. This has come from higher long-term growth expectations and increased inflation expectations from oil and a tighter labour market, lifting US real rates vis-à-vis Japan. US-Japan 10-yr yield spread, which was recovering from a September low of 1.55%, rose from 1.85% on November 7 to 2.35% by January 24. Interestingly, Japan 5-yr forward inflation expectations (FWISJ55) have risen from 0.11% to 0.62%, greater than the US increase from 2.22% to 2.55%, making the Japanese yen less attractive with increasing negative real interest rates. Similarly US 2-yr treasury rates have nudged up from .82% to 1.15% while Japanese rates have held flat at -0.24%. Finally, the 10-yr ‘real’ interest rate differential has widened from 0.32% to 0.62%.

Net-net, Custom Products would have expected a ¥7.4 depreciation from the pre-election rate of ¥104.5 from inflation-expectation adjusted short-term yields, a Y2.8 depreciation based on the real long-term yield differential and a depreciation to ¥118.1 based on the relative money supply growth (otherwise known as the Soros Chart). Each equation has been weighted by the R2 bringing our current fair value USDJPY estimate to ¥112.65 (Chart 1 dark blue line).

Full report available here