‘Ignorance is bliss’, goes the old Japanese proverb – or, translated literally, ‘not knowing is Buddha’. In this age of statistical overload and instant news, such ignorance is hard to come by, and didn’t Tokyo know it last week.
The Japanese government came under pressure for its quarantining of the Diamond Princess cruise ship near Yokohama, as three passengers died of the new coronavirus (now known as COVID-19) and some 100 passengers were infected. The deaths came amid speculation over whether the country can prevent the virus from ruining – or even ruling out – the Tokyo Olympics this summer; some commentators went so far as to speculate that London might end up hosting the games instead. (The World Indoor Athletics Championships, which were due to take place in Nanjing, China next month, have already been postponed.)
The economic benefits of hosting the Olympics have long been disputed, but Japan could certainly do with a short-term boost. Last week, fourth quarter results in Japan showed a 1.6% plunge versus the previous quarter – or a stunning 6.3% annualised. The country is probably falling into a technical recession (defined as two consecutive quarters of negative growth). Interest rates are at -0.1% and the government has already announced fiscal stimulus, meaning fiscal and monetary response options may be limited. So, is the growth dip down to a recent sales tax hike, or is something more fundamental at play?
“The decline appears largely due to the shrink in consumer spending in response to the consumption tax rate increase from 8% to 10% in October, after a surge in demand before the tax rate hike during the previous quarter,” said Yoshihiko Ito of Nippon Value Investors, manager of the St. James’s Place Japan fund. “Unusually warm winter weather and uncertainty over the US–China trade dispute is expected to continue weighing on the world economy – as is the new coronavirus.”
The TOPIX index in Tokyo endured a choppy week of trading, and ended down: its trajectory contrasting with the FTSE 100 and Shanghai Composite, which finished the week in the black, although the S&P 500 ended dowm. While global equities suffered at times last week, they have largely recovered from the COVID-19-induced falls they suffered earlier in the year (although early trading this morning was far from comforting). Japanese stocks, on the other hand, are below where they opened 2020 – have investors been wise to sell?
“We have recently been buying Aica Kogyo, which manufactures chemicals and building and decorative materials,” said Nippon’s Ito. “It has a domestic market share of more than 70% for melamine decorative wall panels, which are used for replacing tile and PVC materials in public and commercial buildings. As a result, the company’s business is less sensitive to economic cycles – consistent sales and earnings growth can be expected.”
That selectivity may be crucial in the coming months, given Japan’s high exposure to China’s economy – and reliance on both Chinese tourists, who are sitting tight, and Chinese factories, many of which are closed. However, Capital Economics argued last week that, while the economy is likely to contract by around 0.2% this year, financial assets in Japan should be relatively well insulated.
“Monetary policy in Japan is already very loose and concerns about the effect of further easing on the financial sector are likely to stay the Bank of Japan’s hand. Indeed, at its last meeting the Bank explicitly said that it is willing to look through a temporary period of slower growth. Investors have also gradually come round to our view that Japan’s monetary policy settings will remain unchanged. We think that the yield of 10-year Japanese government bonds and the yen will end 2020 … roughly where they are now.”
Global stocks and the Chinese economy
Among major stockmarkets outside China, Japan may be particularly sensitive to COVID-19 developments, but the West is hardly insulated. Last Thursday, the S&P 500 took a sharp fall. Part of the impetus was Apple’s earnings announcement, in which the company reported a reduction in its quarterly sales target due to slower iPhone production and weaker demand in China, both due to the virus. More directly, the index was afflicted by news of new COVID-19 deaths in South Korea, Iran and Italy. With a few weeks of rising infection numbers now behind us, is it now possible to make meaningful forecasts?
“There are average anecdotal consensus forecasts of a 2% impact on annualised Chinese economic growth projections of 6%,” said Kieran O’Connor of Rowan Dartington. “The impact will reverberate around the world and have an impact on the earnings of many businesses that will run short of components in manufacturing industries, textiles in the clothing industry and high-volume retail items such as toys and electronics. There will be a longer-lasting dip in bookings in the hotel and leisure industries, especially Asia-bound cruises – and the airlines and Hong Kong will be off the tourist circuit for some time, having already been impacted by the free speech protests last year.”
Beijing last week responded to the economic fallout by cutting a benchmark lending rate (the one-year loan prime rate, to be precise) by 0.1%, just as Standard & Poor’s warned that COVID-19 meant Chinese banks faced a rise of up to $1.1 trillion in bad loans. It forecast 2020 growth in China could fall to 4.4%, should the outbreak not peak until April, but offered a likely scenario of 5% growth.
So, in summation, the world’s second-largest economy is facing huge pressures, while its third-largest, Japan, is apparently falling into recession. As for its fourth-largest, German data released last Tuesday suggests a recession may be under way there, too (and wider eurozone growth has slowed almost to a halt, due in large part to France and Italy). Furthermore, last week saw India rise to become the world’s fifth-largest economy, according to World Population Review but, even there, the recent growth slowdown has been pronounced.
Amid such grim signals, investors are turning increasingly to the US for signs of hope and, thankfully, there are a few to be had. The Philadelphia Fed regional manufacturing report, the Conference Board Leading Economic Index, US jobless claims, Bloomberg’s economic expectations index, residential construction trends, mortgage applications, the Citi Economic Surprise Index, and factory activity indices all offered encouraging data
Finally, there were some boosts from their cousins across the pond, as inflation, manufacturing orders, employment numbers, and Purchasing Managers’ Indices all ticked up in the UK.
Cautious savers suffered another blow last week. Following the downward trend of cash savings rates in recent months (in anticipation of a base rate cut that didn’t come), National Savings and Investments (NS&I) bowed to the inevitable and cut interest rates on its range of popular products.
These include Premium Bonds, owned by around 22 million people, as well as the variable and fixed rate account options.1 It means that, on average, NS&I rates will be 0.5% below current market leaders;2 a significant shortfall, although it may be a price that savers will continue to pay for the security of having their savings backed by the government.
News that inflation jumped to a six-month high in January underlined the challenge facing cash savers. More encouragingly, positive numbers for the UK economy appeared to rule out the need for the Bank of England to cut rates. That said, there is very little prospect of a rise soon either.
1 Source: NS&I, February 2020
2 Source: Technical Connection, February 2020
In The Picture
It’s tempting to leave money in cash and cross your fingers that inflation won’t go up too much. But a glance at UK financial history shows that inflation – even on an annualised basis – doesn’t exactly move in gentle, predictable curves.
The Last Word
Pyke notte thyne errys nothyr thy nostrellys.
Advice to children not to pick their ears or nostrils, from The Lytille Childrenes Lytil Boke, 1480. The work, which aimed to teach children table manners, was digitised last week by the British Library.
First State, Schroders and Wasatch are fund managers for St. James’s Place.
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