What caught my eye? v - Macquarie€¦ · What caught my eye? v.102 global harbour for 2019? Key...
Transcript of What caught my eye? v - Macquarie€¦ · What caught my eye? v.102 global harbour for 2019? Key...
Please refer to page 22 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
12 December 2018 Global
EQUITIES
MQ – Japan ‘Quality Sustainable Growth’ Portfolio – back testing
Source: Factset; MSCI; Macquarie Research, December 2018; Portfolio selections and stocks are in Table 49, p15
Japan – Corporate ROE (%) – at the highest level since mid-1980s
Source: Datastream; Macquarie Research, December 2018
Inside
Japan – a perennially underappreciated
economy 2
Modest expectations and high ROE –
a good mix 13
Appendices 16
What caught my eye? v.102 Is Japan a safe global harbour for 2019?
Key points
Japan remains an exception to the rules & shows path forward for the world.
High savings, no FX mismatches, productivity, innovation & BoJ are key.
Corporates are in rude health; score on leverage, EPS, ROEs & valuations.
Japan exceptionalism is likely to be durable, reducing…
As discussed in our ‘19 preview, investors are facing risks arising on almost every
front, from monetary and fiscal policies, politics and trade, valuations & corporate
returns. It just might all fall into place, but that would be nothing short of a miracle.
The winds of change and volatilities are likely to buffet US, EU & Chinese
markets, while EMs remain on tender hooks of US$, global liquidity and trade.
However, there is one major market, which just might avoid most of the extremes.
Japan has always been an exception and an asterisk to key developments over
the last three decades. It has been occasionally regarded as a weak link in the
chain that is just about to break and at other times it has been viewed as a true
visionary, pointing to our common financial & technological future. Betting against
¥ has been the widowmaker trade for longer than some of our clients were alive
while its industries have been perpetually written-off, only to see them resurrected
in a different form. Its services has been criticised for low productivity, only to be
partially resuscitated by a rapid inflow of tourists while Japan has also become
the world’s second-largest exporter of royalties and intellectual capital. Over the
last decade, its productivity has not lagged DMs and even exceeded some EMs.
Despite terrible demographics, Japan has never embraced immigration, and thus
it has avoided social dislocations, while BoJ is methodically taking care of debts.
Japan has consistently broken rules of conventional economics, and did not just
get away with it but in fact prospered, with per capita income maintained at a high
level throughout a three-decade transition, following the ‘body blow’ of the early
1990s that was at least five times greater than GFC. While pessimists argue that
the day of reckoning has not been abolished but simply deferred (i.e. ‘Japan is a
bug in search of a windshield’ argument), this view has over the years become
less believable or sustainable, particularly as the rest of world has been
converging on the Japanese model. It now seems to be just ahead of the curve.
…volatility and providing greater stability in a turbulent world
In our view, five factors have enabled Japan to turn conventional economics on
its head: (a) high level of savings and low international ownership of its debt and
securities, with no currency mismatches; (b) high degree of state control and
influence, as Japan has never been a conventional capitalist economy; (c) trust in
institutions of state, and hence, limited pressure of capital outflows; (d) egalitarian
income distribution and ethnically homogeneous population; and (e) corporate
sector, which though not as good as it could be at commercializing new products,
has proven to be innovative, pushing frontiers and complexity. These factors
remain as pertinent today as they were in ‘90s, perhaps even more so, as Japan
has also gained deep experience in managing a financialized economy.
At the same time, the beaten down Japanese investors are averse to bullishness
with neither EPS estimates nor multiples being at a significant variation to the
likely outcomes (unlike, US or EMs, where expectations are still too high) while
corporate ROEs have returned to mid-1980s levels. These micro factors are also
buttressed by a higher predictability of BoJ policies (vs Fed or ECB). The only
uncertainty is the next stage of consumption tax. What is there not to like?
90
100
110
120
130
140
150
De
c-1
6
Ja
n-1
7
Feb
-17
Mar-
17
Apr-
17
May-1
7
Ju
n-1
7
Ju
l-17
Aug
-17
Sep
-17
Oct-
17
No
v-1
7
De
c-1
7
Ja
n-1
8
Feb
-18
Mar-
18
Apr-
18
May-1
8
Ju
n-1
8
Ju
l-18
Aug
-18
Sep
-18
Oct-
18
No
v-1
8
Japan QSG Price Performance relative to MSCI Japan
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
De
c-8
0
De
c-8
2
De
c-8
4
De
c-8
6
De
c-8
8
De
c-9
0
De
c-9
2
De
c-9
4
De
c-9
6
De
c-9
8
De
c-0
0
De
c-0
2
De
c-0
4
De
c-0
6
De
c-0
8
De
c-1
0
De
c-1
2
De
c-1
4
De
c-1
6
Japan market - ROE
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 2
Japan – a perennially underappreciated economy
‘Japan is a Bug Searching for a Windshield’, John Mauldin
In our view, few economies have been more misunderstood and underappreciated than Japan’s
(perhaps China’s economy comes in as the second in line). The above quote from an investment
book eight years ago exemplifies the conventional wisdom about Japan: having transferred
US$6 trillion from the private to the public sectors between 1991 and the early 2000s, the only way
forward is either a deflationary restructuring of monumental proportions or (more likely) an inflation
of debt away, with the concurrent currency collapse.
A modern version of the classic Hick’s liquidity trap kept at bay by the BoJ
Indeed, in many ways, this has been the view of most economists, who have always believed that
nominal growth (whether real or inflation) is the only solution to the debt overhang (Paul Krugman
was highlighting it as early as 1997/98, and hence, his advocacy for a much more robust monetary
and fiscal response to overcome the ‘liquidity trap’ conditions and Bernanke had a similar advice in
2003). In Krugman’s famous words, in order to succeed, BoJ must promise to be ‘credibly
irresponsible’ and arguably since the ascension of Shinzo Abe and Haruhiko Kuroda to power in
2012, Japan has been following the core premise that the only way for private sector to change its
deeply imbedded deflationary mindset is to become convinced that changes in monetary policies
are permanent rather than temporary responses (i.e. become ‘credibly irresponsible’).
As can be seen below, while BoJ initial responses in 1990s were somewhat muddled, the last
decade has witnessed a far more robust and consistent expansion of the monetary base, which
has broadly coincided with the end of private sector balance sheet de-leveraging. Out of Abe’s
infamous three arrows (i.e. monetary, fiscal and structural reform), only monetary has flown at a
full speed, with fiscal continuing to muddle with counter-productive consumption tax increases
intertwined with annual ‘supplementary budgets’. The structural arrow (as always) is something
that is in the eye of the beholder but from our perspective, very little has actually occurred. The
robust response by the Fed in the early months of the liquidity trap (2009), can be contrasted by
much more muted (until recently) response by ECB and even more muted initial response by BoJ.
Fig 1 Monetary Base (months since asset bubble burst) – Massive acceleration in Japan
Source: Bloomberg, Macquarie Research, December 2018
In some ways, Krugman and Bernanke were proven partially right, as Japan has recently
experienced a mild degree of nominal GDP acceleration, following decades of stagnation. The
same occurred to household and business expectations of inflation. The liquidity trap model, which
argues that monetary policies turn impotent when an economy falls into liquidity trap and that only
very aggressive policies can coax it out, has proven to be at least partially correct. However, as a
result, the BoJ is now sitting on over 100% of Japan’s GDP and controls around 50% of
JGBs. It has been recently forced to widen trading ranges (to 0.2%), as otherwise there was
simply no longer any meaningful volume in a JGB market, and any semblance of a price discovery
has largely disintegrated.
100
200
300
400
500
600
700
800
900
1,000
1,100
1,200
1,300
34
5
33
2
31
9
30
6
29
3
28
0
26
7
25
4
24
1
22
8
21
5
20
2
18
9
17
6
16
3
15
0
13
7
12
4
11
1
98
85
72
59
46
33
207
Japan US Eurozone
Japan has been a
consistently
misunderstood
economy
Has BoJ become
credibly irresponsible?
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 3
Fig 2 Japan – National Debt to GDP (%) – stabilized at just over 5x, with public sector shouldering…
Fig 3 Japan – Private sector Debt to GDP (%) - …a significant decline in private sector debt commitments
Source: CEIC; Macquarie Research, December 2018 Source: CEIC, Macquarie Research, December 2018
Fig 4 Japan – Core CPI ex Food, Energy & Consumption Tax (%) – managing to stay just above zero…
Fig 5 Japan – Household Expectations of Inflation – …as more people believe that there would be some inflation
Source: CEIC; Macquarie Research, December 2018 Source: CEIC, Macquarie Research, December 2018
Fig 6 Japan – BoJ Assets (% GDP) – closing on 100% of GDP and…
Fig 7 Japan – BoJ (% of JGB) - …close to 49% of outstanding JGBs
Source: CEIC; Macquarie Research, December 2018 Source: CEIC, Macquarie Research, December 2018
0%
100%
200%
300%
400%
500%
600%
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
Public Non-financial Business Household Finance
525%
250%
0%
50%
100%
150%
200%
250%
300%
350%
400%
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
Non-financial Business Household Finance
370%
220%
300%
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Ja
n-0
5
Aug
-05
Mar-
06
Oct-
06
May-0
7
De
c-0
7
Ju
l-08
Feb
-09
Sep
-09
Apr-
10
No
v-1
0
Ju
n-1
1
Ja
n-1
2
Aug
-12
Mar-
13
Oct-
13
May-1
4
De
c-1
4
Ju
l-15
Feb
-16
Sep
-16
Apr-
17
No
v-1
7
Ju
n-1
8
CPI - ex Food and Energy
0.2%
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
Apr-
04
De
c-0
4
Aug
-05
Apr-
06
De
c-0
6
Aug
-07
Apr-
08
De
c-0
8
Aug
-09
Apr-
10
De
c-1
0
Aug
-11
Apr-
12
De
c-1
2
Aug
-13
Apr-
14
De
c-1
4
Aug
-15
Apr-
16
De
c-1
6
Aug
-17
Apr-
18
HH expecting prices to go up less than 2%
HH expecting prices to go up more than 2%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Mar-
10
De
c-1
0
Sep
-11
Ju
n-1
2
Mar-
13
De
c-1
3
Sep
-14
Ju
n-1
5
Mar-
16
De
c-1
6
Sep
-17
Ju
n-1
8
BoJ/GDP
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
Apr-
01
Ja
n-0
2
Oct-
02
Ju
l-03
Apr-
04
Ja
n-0
5
Oct-
05
Ju
l-06
Apr-
07
Ja
n-0
8
Oct-
08
Ju
l-09
Apr-
10
Ja
n-1
1
Oct-
11
Ju
l-12
Apr-
13
Ja
n-1
4
Oct-
14
Ju
l-15
Apr-
16
Ja
n-1
7
Oct-
17
Ju
l-18
BoJ % of JGB
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 4
So what’s next for BoJ, JGBs and the Japanese economy?
The conventional economics would argue that nothing has changed, and that BoJ has simply
delayed the day of reckoning. Given that Japan continues to maintain expansionary fiscal policies
(deficits), if it tries to ‘live within its means’ by closing these deficits, the country would be plunged
into an immediate and deep recession. As in Eurozone (think of Greece), this would lead to an
explosion of debt to GDP ratios, suddenly making something that is just bearable into
unsustainable. On the other hand, if the Government somehow manages to ignite even a mild
inflation, interest rates would increase, and the debt burden would quickly become unsustainable
and potentially unserviceable. Also, if investors genuinely believe that inflation would take off, why
would they continue buying JGBs? If Japan attempts to significantly cheapen its currency, it could
easily cause a global currency devaluation spree, and in view of Japan’s central positioning in
almost all of the world supply chains, it would ignite global deflation. On top of that, Japan’s rapidly
deteriorating demographics hampers its ability to accelerate real GDP growth rates.
As in a ‘Catch 22’, these are the nightmares from hell, and given that Japan is still the third-largest
economy in the world and the second-largest debt market, implications for both global economy
and Central Bank policies are immense. Hence, Japan has been regularly characterized as one of
the world’s key systemic flash points.
There are no conventional rules in a modern world & Japan was always different
Indeed, if Japan was a conventional economy, it would have by now gone through a purgatory of
multiple debt defaults, IMF bail-outs and revolutions. However, thankfully, Japan is neither a
conventional society, nor is it a conventional economy, while the world and its rules are
increasingly tilting towards Japan and its business model. In our view there are several key factors
that have differentiated (and protected) Japan in the past, and these factors continue to exercise a
strong gravitational pull, negating most of the traditional economic views.
1. First, Japan (as a nation, rather than just households) continues to maintain high
saving rates. On a sectoral basis, the private sector is currently saving ~6-7% of GDP,
while the public sector is dissaving less than 3% of GDP, implying an excess capital that
is not used within Japan of ~3-4% of GDP (or in other words, Japan continues to run a
persistent current account surplus). As a result, Japan remains a net export of capital.
While this clearly implies that the country is essentially riding global cycles, rather than
contributing to net global demand, it does provide a great deal of flow stability, with
foreigners still owning only ~11–12% of Japanese bonds. Thus, Japan not only borrows in
its own currency (and hence no FX mismatches), it also remains a predominantly
domestic financial market.
Fig 8 Japan – Sectoral Balances (Quarterly) (% of GDP)
Fig 9 Japan – Sectoral Balances (Annual) (% of GDP) – 1980-2017
Source: CEIC; Macquarie Research, December 2018 Source: CEIC, Macquarie Research, December 2018
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
De
c-9
8
Mar-
00
Ju
n-0
1
Sep
-02
De
c-0
3
Mar-
05
Ju
n-0
6
Sep
-07
De
c-0
8
Mar-
10
Ju
n-1
1
Sep
-12
De
c-1
3
Mar-
15
Ju
n-1
6
Sep
-17
ROW Private Sector Public Sector
Saving
Spending
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
Private Sector Government ROW
Saving
Spending
While conventional
economics expects an
ultimate dislocation…
…we believe that there
are factors that protect
Japan…
…including high saving
rates and no FX
mismatches
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 5
Fig 10 National Saving Rates (% GDP) – remain at ~27–28%
Fig 11 Japan – Foreign Bond Ownership (%) – only ~12%, though up from 6–8% twenty years ago
Source: IMF; Macquarie Research, December 2018 Source: ADB, Macquarie Research, December 2018
2. Second, disinflationary climate, high national saving rates and the aggressive posture by
BoJ, implies that interest payments as a proportion of government spending is only
~5%, compared to 11–12% in the early 1990s. At the same time, Japan has maintained
market credibility by selectively boosting and adjusting national commitments to elderly
and medical care while irregularly pushing up consumption tax (with the next rise due in
October 19). Although some of these measures are counter-productive, they have thus
far placated global markets, and precluded a panic setting in.
As Paul Krugman once famously remarked, ‘we know that advanced economies with
stable governments that borrow in their own currency are capable of running up very high
levels of debt without crises’. This particularly applies to any country that
systematically manages market expectations and generates surpluses (a la Japan).
Fig 12 Japan – Government – Revenue & Expenditure (% of GDP) – persistent but a controlled gap
Fig 13 Japan – Government Interest Servicing (% of expenditure) – down to only 5%, thanks to prudent management & BoJ
Source: CEIC; Macquarie Research, December 2018 Source: CEIC, Macquarie Research, December 2018
3. Third, Japan has remained an exceptionally homogeneous society, and a strong
consensus has formed over the last two decades that maintenance of cohesion
and existing per capita income levels should be the key objective of national
policies. While this does imply growing frictions between younger and older generations,
and inequality is gradually rising, it enabled the country to overcome a body blow that was
at least 5x more severe than the Global Financial Crisis. It should be kept in mind that
Japanese losses (real estate and equities) in ‘90/91, exceeded US$15 trillion (or 3x
GDP). For perspective, US losses during GFC were less than one-fifth of that level.
As can be seen below, Japan’s per capita income (2010 US$) is today broadly equal to
Germany and 10% ahead of France and perhaps not much more than 10–15% below the
10
15
20
25
30
35
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
Japan US Eurozone UK
-
2
4
6
8
10
12
14
Mar-
98
Ju
n-9
9
Sep
-00
De
c-0
1
Mar-
03
Ju
n-0
4
Sep
-05
De
c-0
6
Mar-
08
Ju
n-0
9
Sep
-10
De
c-1
1
Mar-
13
Ju
n-1
4
Sep
-15
De
c-1
6
Mar-
18
Japan
25.0%
27.0%
29.0%
31.0%
33.0%
35.0%
37.0%
39.0%
41.0%
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Gov Rev to GDP Gov Exp to GDP
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Gov Interest to Expense ratio
…ability to control yield
curve and experience of
maintaining trust…
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 6
US. It is remarkable how following the debacle of 1990/91, Japan managed to keep its
relative per capita income flat for more than two decades. This even applies if we use
PPP adjustment, which traditionally penalizes Japan. While, it is true that today’s Japan is
only a fraction of its relative size and importance vs late 1980s/early 1990s, the country
has essentially achieved a ‘tranquil autumn’ of a civilized relative stagnation.
Fig 14 Japan – GDP/Capita (%) – (US$ Constant 2010) Fig 15 Japan – GDP/Capita (%) – (US$ 2011 PPP)
Source: World Bank; Macquarie Research, December 2018 Source: World Bank, Macquarie Research, December 2018
Fig 16 Japan – Gini Coefficient – 2007-16 – remains egalitarian
Fig 17 Japan Land Prices Index – loss of US$13 trillion in 1990s
Source: OECD; Macquarie Research, December 2018 Source: CEIC, Macquarie Research, December 2018
Fig 18 Japan – Equity Market Loss in 1990s (Yen Trillion)
Fig 19 Global – Share of GDP (PPP) (%) – down from 9% to 4%
Source: CEIC; Macquarie Research, December 2018 Source: IMF, Macquarie Research, December 2018
60%
70%
80%
90%
100%
110%
120%
130%
140%
150%
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
Japan (% OECD) Japan (% Germany)
Japan (% France) Japan (% US)
60%
70%
80%
90%
100%
110%
120%
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Japan (% OECD) Japan (% Germany)
Japan (% France) Japan (% US)
0.20
0.22
0.24
0.26
0.28
0.30
0.32
0.34
0.36
0.38
0.40
US
UK
Spa
in
Austr
alia
Ita
ly
Ja
pa
n
Ca
na
da
Fra
nce
Kore
a
Ge
rman
y
Sw
eden
2007 2016
0
20
40
60
80
100
120
140
0
20
40
60
80
100
120
140
160
180
200
Mar-
55
Feb
-58
Ja
n-6
1
De
c-6
3
No
v-6
6
Oct-
69
Sep
-72
Aug
-75
Ju
l-78
Ju
n-8
1
May-8
4
Apr-
87
Mar-
90
Feb
-93
Ja
n-9
6
De
c-9
8
No
v-0
1
Oct-
04
Sep
-07
Aug
-10
Ju
l-13
Ju
n-1
6
Commercial Residential, rhs
0
100
200
300
400
500
600
700
Ja
n-7
1
Mar-
72
May-7
3
Ju
l-74
Sep
-75
No
v-7
6
Ja
n-7
8
Mar-
79
May-8
0
Ju
l-81
Sep
-82
No
v-8
3
Ja
n-8
5
Mar-
86
May-8
7
Ju
l-88
Sep
-89
No
v-9
0
Ja
n-9
2
Mar-
93
May-9
4
Ju
l-95
Sep
-96
TSE Market Capitalization (Yen Trillion)
Loss of ~US$2 trillion
0
2
4
6
8
10
12
14
16
18
20
0
1
2
3
4
5
6
7
8
9
10
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
Germany Japan China, rhs
…consensus about
maintenance of stability
& relative income
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 7
4. Fourth, apart from the role that the state and BoJ have played in relieving the private
sector from its excessive debt burden accumulated during the 1980s (and the corporate
sector is now in truly rude health), the ability of Japan to maintain its relative income
levels has been boosted by the country’s consistent track record of maintaining
innovation and keeping the complexity of the economy high. As highlighted in our
past reviews, complexity ratios are some of the best indicators of the capacity to maintain
income while keeping income and wealth inequalities in check (here).
While Japan has never been very good at commercializing inventions (from flat screens
to Walkman), it has consistently been good at staying on top of R&D, patents and
complexity indices. This in turn has been translating into a steady TFP (or multi-factor
productivity) of at least 25bps-75bps per annum. This has recently been better than most
DMs and indeed even some EMs (such as China, Malaysia, Brazil or South Africa).
Fig 20 Global – Triadic Patent Families (% share) – Japan has consistently controlled over 30% of global patents
Fig 21 Global – R&D Spending (% of GDP) – Japan consistently spends around 3–3.5% of GDP
Source: OECD; Macquarie Research, December 2018 Source: World Bank, Macquarie Research, December 2018
Fig 22 Global – Economic Complexity Indices – Japan remains consistently the most complex economy in the world
Fig 23 Key Economies – Total Factor Productivity – following collapse in 1980s-90s, Japan’s TFP steadied over the last decade
Source: Complexity Atlas; Macquarie Research, December 2018 Source: TED, Macquarie Research, December 2018
1996 2000 2005 2010 2015 Per Capita (m)
Japan 27.1% 32.2% 29.2% 35.1% 31.2% 137.8
US 33.0% 28.1% 28.6% 24.4% 26.7% 46.5
EU 33.6% 31.8% 30.3% 25.3% 24.4% 26.6
-Germany 14.1% 13.7% 11.8% 9.7% 8.0% 54.3
-France 5.5% 5.3% 5.0% 4.7% 4.6% 39.7
-UK 4.3% 4.2% 3.6% 3.2% 3.3% 27.9
China 0.1% 0.2% 0.9% 2.7% 5.2% 2.1
Korea 0.8% 1.6% 4.5% 4.7% 4.9% 54.1
Switzerland 2.1% 1.8% 1.8% 2.0% 2.2% 160.9
ROW 3.4% 4.3% 4.8% 5.6% 5.5% 0.6
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Kore
a
Ja
pa
n
Taiw
an
Ge
rman
y
US
Fra
nce
Sin
g
Austr
alia
Ch
ina
Ca
na
da
UK
Ita
ly
Spa
in
Mala
ysia
Ru
ssia
Bra
zil
Turk
ey
India
HK
G
SA
Mexic
o
Tha
iland
Phili
ppin
es
Indo
n
2000 2015
-0.3
0.0
0.3
0.5
0.8
1.0
1.3
1.5
1.8
2.0
2.3
2.5
2.8
Ja
pa
n
Sw
itze
rla
nd
Ge
rman
y
Kore
a
Sw
eden
UK
US
Fra
nce
Ch
ina
Tha
iland
Mala
ysia
Turk
ey
Bra
zil
India
SA
Ind
on
esia
Average (1995-2000) Average (2010-2016)
1980-1989 1990-1999 2000-2009 2010-2016 2013-2016
China 0.6 1.2 1.9 0.4 -0.6
Japan -1.2 -1.1 -0.5 0.5 0.2
Malaysia -1.2 -1.2 0.1 -0.4 -0.6
Korea 0.2 0.5 0.7 0.4 0.1
Taiwan 2.4 1.0 0.6 1.2 0.2
Canada -0.1 0.2 -0.6 -0.1 0.0
US 0.7 0.8 0.6 0.2 -0.1
Australia 0.4 0.8 -0.3 -0.2 0.1
France 0.8 -0.1 -0.4 -0.2 -0.2
Germany 0.8 0.4 -0.3 0.7 0.4
Italy 1.0 0.1 -1.1 -0.2 -0.2
Spain 1.4 -0.4 -1.0 -0.3 0.1
UK 0.6 0.1 0.2 0.0 0.1
The country is boosted
by its strong presence
in R&D, patents &
complexity
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 8
Fig 24 Japan – Non-Financial Corporate sector – Debt & Cash (¥ trillion) – very strong corporate balance sheets…
Fig 25 Japan – Non-Financial Corporate Sector – Net Debt/EBITDA (X) – …. leverage is the lowest since early 1980s
Source: MoF; Macquarie Research, December 2018 Source: MoF, Macquarie Research, December 2018
5. While its demographics are appalling, Japan is showing that in a modern world,
productivity is not driven by youth and vigour, but rather by increasing automation, and
high participation rates by older cohorts. Japan’s installation of robots as well as
penetration of robots per 10,000 employees is either second or third highest amongst the
key economies. The country is also becoming a force in the deployment of service robots.
Fig 26 Industrial Robots Density (per 10,000 employees) - 2017
Fig 27 Installation of New Industrial Robots (‘000) – 2015-17
Source: IFR; Macquarie Research, December 2018 Source: IFR, Macquarie Research, December 2018
Fig 28 Labour Participation Rate (45y-54y cohort) (%) Fig 29 Labour Participation rate (over 65 years cohort) (%)
Source: CEIC; Macquarie Research, December 2018 Source: CEIC, Macquarie Research, December 2018
-30
20
70
120
170
220
0
100
200
300
400
500
600
Mar-
70
Mar-
72
Mar-
74
Mar-
76
Mar-
78
Mar-
80
Mar-
82
Mar-
84
Mar-
86
Mar-
88
Mar-
90
Mar-
92
Mar-
94
Mar-
96
Mar-
98
Mar-
00
Mar-
02
Mar-
04
Mar-
06
Mar-
08
Mar-
10
Mar-
12
Mar-
14
Mar-
16
Mar-
18
Debt Cash & Deposits RHS
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Mar-
71
Mar-
73
Mar-
75
Mar-
77
Mar-
79
Mar-
81
Mar-
83
Mar-
85
Mar-
87
Mar-
89
Mar-
91
Mar-
93
Mar-
95
Mar-
97
Mar-
99
Mar-
01
Mar-
03
Mar-
05
Mar-
07
Mar-
09
Mar-
11
Mar-
13
Mar-
15
Mar-
17
Net Debt/EBITDA (x) Average (1970-2015)
2.7x
710
322 308
200 197
97
0
100
200
300
400
500
600
700
800
Korea Germany Japan US Taiwan China
units
Global Density = 850 20 40 60 80 100 120 140 160
China
Japan
Korea
US
Germany
2015 2016 2017
76.0
78.0
80.0
82.0
84.0
86.0
88.0
90.0
Ja
n-0
7
Ju
l-07
Ja
n-0
8
Ju
l-08
Ja
n-0
9
Ju
l-09
Ja
n-1
0
Ju
l-10
Ja
n-1
1
Ju
l-11
Ja
n-1
2
Ju
l-12
Ja
n-1
3
Ju
l-13
Ja
n-1
4
Ju
l-14
Ja
n-1
5
Ju
l-15
Ja
n-1
6
Ju
l-16
Ja
n-1
7
Ju
l-17
Ja
n-1
8
Ju
l-18
Japan US
45-54Y
13.0
15.0
17.0
19.0
21.0
23.0
25.0
27.0
Ja
n-0
7
Ju
l-07
Ja
n-0
8
Ju
l-08
Ja
n-0
9
Ju
l-09
Ja
n-1
0
Ju
l-10
Ja
n-1
1
Ju
l-11
Ja
n-1
2
Ju
l-12
Ja
n-1
3
Ju
l-13
Ja
n-1
4
Ju
l-14
Ja
n-1
5
Ju
l-15
Ja
n-1
6
Ju
l-16
Ja
n-1
7
Ju
l-17
Ja
n-1
8
Ju
l-18
Japan US
Over 65Y
Automation & high
labour participation
rates overcomes
demographics
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 9
6. Although in minds of most investors it is primarily associated with industrial strengths,
Japan is actually picking up a lot of steam in external services. In particular, Japan’s
current account balances are increasingly supported by growing tourism flows (with the
latest numbers setting multi-decade highs), a growing contribution from license fees and
royalty payments as well as burgeoning returns on overseas investments.
As can be seen below, Japan last year (‘17) exported almost US$42bn of license fees
and royalties (the second-highest globally) and generated net surplus of US$21bn. This
compares to ‘10 exports of US$27bn or a CAGR of ~7% over the last decade. As in the
case of patents, neither Korea, China nor Taiwan come anywhere near close to the depth
and strength of Japan’s intellectual property exports. At the same time, tourist arrivals to
Japan have reached the highest ever level of more than 2.6m per month (or about 32m
per annum) and since 2015, the net trade travel balances have become consistently
positive. Although clearly the weaker ¥ helped, the improvement was also due to a
greater promotional support, better infrastructure and Japan’s improving rating in tourism
competitiveness. Indeed, over the past decade, Japan has been the single best improver
amongst major developed economies, with its ranking in WEF’s Tourism competitiveness
rising from 25th in 2007 to 22nd in 2011 and to the 4th ranking globally in 2017.
Fig 30 Key Exporters of License & Royalty Fees (US$ bn)
Fig 31 Japan – Intellectual Exports & Net Balances (¥ bn) – balances turned positive since 2004
Source: UNCTAD; Macquarie Research, December 2018 Source: CEIC, Macquarie Research, December 2018
Fig 32 Japan – Tourism Arrivals & Departures – 12mma (‘000) – the highest level of arrivals ever
Fig 33 Japan – Net Travel & Tourism Balance (¥ bn) – turned strongly positive since 2015
Source: CEIC; Macquarie Research, December 2018 Source: CEIC, Macquarie Research, December 2018
Exports 2010 2011 2012 2013 2014 2015 2016 2017
US 107.5 123.3 124.4 128.0 129.7 124.4 124.5 127.9
Japan 26.7 29.1 31.9 31.6 37.4 36.5 39.2 41.7
Switzerland 13.4 15.8 17.3 18.6 18.2 16.2 21.0 21.6
Germany 8.2 10.7 10.3 13.6 15.5 15.2 17.6 19.6
France 13.6 15.3 12.7 13.1 14.6 15.1 15.5 16.4
UK 16.5 17.0 15.5 17.3 19.8 19.4 17.1 16.9
Italy 3.6 4.0 4.1 3.7 3.3 3.0 3.4 4.6
Korea 3.2 4.4 3.9 4.3 5.2 6.2 6.6 7.1
Singapore 1.0 1.7 1.9 3.2 3.8 8.8 7.4 8.3
Taiwan 0.5 0.8 0.9 1.0 0.9 1.2 1.2 1.7
China 0.8 0.7 1.0 0.9 0.7 1.1 1.2 4.8
Net Balance
US 75.0 87.2 85.8 89.2 87.7 84.6 80.1 79.6
Japan 7.9 9.9 12.0 13.8 16.5 19.4 19.5 21.1
Swizerland 5.3 5.1 6.2 6.8 4.1 3.3 8.9 10.2
Germany 1.2 3.3 3.9 4.9 4.8 5.5 7.1 7.8
France 3.6 4.8 4.0 2.1 1.8 0.7 2.3 3.1
UK 6.9 5.9 6.3 7.4 9.4 6.4 5.1 4.8
Italy (2.9) (2.6) (1.5) (1.7) (1.9) (1.3) (1.3) (0.2)
Korea (6.0) (3.0) (4.7) (5.5) (5.4) (3.9) (2.8) (2.1)
Singapore (15.9) (18.3) (20.8) (19.7) (17.0) (13.1) (11.1) (11.6)
Taiwan (4.5) (5.0) (4.7) (4.2) (4.4) (4.4) (4.1) (2.1)
China (12.2) (14.0) (16.7) (20.1) (21.9) (20.9) (22.8) (23.8)
-1,000
0
1,000
2,000
3,000
4,000
5,000
6,000D
ec-9
6
No
v-9
7
Oct-
98
Sep
-99
Aug
-00
Ju
l-01
Ju
n-0
2
May-0
3
Apr-
04
Mar-
05
Feb
-06
Ja
n-0
7
De
c-0
7
No
v-0
8
Oct-
09
Sep
-10
Aug
-11
Ju
l-12
Ju
n-1
3
May-1
4
Apr-
15
Mar-
16
Feb
-17
Ja
n-1
8
12M Sum of Monthly Net Balance
12M Sum of Monthly Charges of Intellectual's Use Export
12M Sum of Monthly Charges of Intellectual's Use Import
JPY bn
0
500
1,000
1,500
2,000
2,500
3,000
De
c-6
2
Apr-
65
Aug
-67
De
c-6
9
Apr-
72
Aug
-74
De
c-7
6
Apr-
79
Aug
-81
De
c-8
3
Apr-
86
Aug
-88
De
c-9
0
Apr-
93
Aug
-95
De
c-9
7
Apr-
00
Aug
-02
De
c-0
4
Apr-
07
Aug
-09
De
c-1
1
Apr-
14
Aug
-16
12MMA of Visitor Arrivals 12MMA of Residents Departure
Thousand Person
-5,000
-4,000
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
4,000
5,000
De
c-9
6
No
v-9
7
Oct-
98
Sep
-99
Aug
-00
Ju
l-01
Ju
n-0
2
May-0
3
Apr-
04
Mar-
05
Feb
-06
Ja
n-0
7
De
c-0
7
No
v-0
8
Oct-
09
Sep
-10
Aug
-11
Ju
l-12
Ju
n-1
3
May-1
4
Apr-
15
Mar-
16
Feb
-17
Ja
n-1
8
12M Sum of Monthly Net Balance
12M Sum of Monthly Travel Service Export
12M Sum of Monthly Travel Service Import
JPY bn
Japan is also becoming
a significant external
services provider but…
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 10
Fig 34 Japan – Investment Flows (¥ bn) Fig 35 Japan – Key CA Service net exports (¥ bn)
Source: CEIC; Macquarie Research, December 2018 Source: CEIC, Macquarie Research, December 2018
7. Domestic productivity (or lack of it) has always been Japan’s ‘Achilles heel’. As can
be seen below, it still remains so, but on a number of metrics, Japan is really not that
much different to most comparable (in terms of living standards) countries (such France,
Germany or Australia or its immediate neighbour, South Korea). On average, Japan’s
domestic sectors only have ~60–70% of the US domestic productivity. The gap is
particularly pronounced in construction, transportation and storage.
Fig 36 Domestic Services (ex-Utilities) – GVA/Employee (US=100)
Fig 37 Construction – GVA/Employee (US=100%)
Source: CEIC; ILO; Macquarie Research, December 2018 Source: CEIC; ILO; Macquarie Research, December 2018
Fig 38 Wholesale/Retail Trade, Hotels – GVA/Employee (US=100)
Fig 39 Government Services – GVA/Employee (US=100%)
Source: CEIC; ILO; Macquarie Research, December 2018 Source: CEIC; ILO; Macquarie Research, December 2018
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
De
c-9
6
Oct-
97
Aug
-98
Ju
n-9
9
Apr-
00
Feb
-01
De
c-0
1
Oct-
02
Aug
-03
Ju
n-0
4
Apr-
05
Feb
-06
De
c-0
6
Oct-
07
Aug
-08
Ju
n-0
9
Apr-
10
Feb
-11
De
c-1
1
Oct-
12
Aug
-13
Ju
n-1
4
Apr-
15
Feb
-16
De
c-1
6
Oct-
17
Aug
-18
12M Sum of Monthly Net Balance
12M Sum of Investment Income Inflow
12M Sum of Investment Income Outflow
JPY bn
-36,000
-30,000
-24,000-18,000
-12,000
-6,000
06,000
12,000
18,000
24,000
-4,000
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
De
c-9
6
Mar-
98
Ju
n-9
9
Sep
-00
De
c-0
1
Mar-
03
Ju
n-0
4
Sep
-05
De
c-0
6
Mar-
08
Ju
n-0
9
Sep
-10
De
c-1
1
Mar-
13
Ju
n-1
4
Sep
-15
De
c-1
6
Mar-
18
Travel Service Net Balance
Charges of Intellectual's Use Net Balance
Investment Income Net Balance (RHS)
JPY bn JPY bn
40%
50%
60%
70%
80%
90%
100%
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Japan Germany France
Australia Korea
40%
50%
60%
70%
80%
90%
100%
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Japan Germany France
Australia Korea
0%
20%
40%
60%
80%
100%
120%
140%
160%
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Japan Germany France
Australia Korea
50.0%
55.0%
60.0%
65.0%
70.0%
75.0%
80.0%
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Japan Germany France
Australia Korea
…domestic productivity
remains an issue
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 11
In summary, Japan is in many ways a unique economy and society, characterized by:
1. High degree of ethnic homogeneity and relatively egalitarian distribution of income and
wealth;
2. A strong popular consensus that the objective of national policies should be maintenance
of standards of living, rather than ‘chasing the rainbows’;
3. Rapidly deteriorating demographics, which is forcing the country to the outer frontiers of
automation and robotics and finding creative ways of keeping older cohort participation
rates at one of the highest levels amongst developed economies;
4. High spending on R&D, strong portfolio of patents and intellectual property rights (second
only to the US), which is keeping Japan’s complexity indices high, implying a higher than
average prevalence of unique and relatively price inelastic products;
5. Tightly co-ordinated fiscal and monetary policies, which aim to ensure that there are no
panics and confidence in the state and its institutions is maintained.
6. This co-ordination is enhanced by the fact that Japan has never been a true capitalist
economy. Despite protestation to the contrary, BoJ is not effectively an independent
institution, and MITI (or METI, since 2001) still sets parameters for private sector. In that
respect Japan is quite similar to China.
The clear downside of these structural pluses is a lack of conventional capitalist market
efficiencies. Despite several tentative de-regulatory moves, Japan’s labour market remains one of
the most sclerotic amongst developed economies, with sharp differentiation between the full-time,
part-time and casual workforce as well as relatively rigid promotional systems. Recent de-
regulation drives have left bulk of the domestic economy (from agriculture, construction,
transportation to services) largely untouched. Abe’s ‘third arrow’ has never really left the bow, and
we maintain that the deregulatory agenda is highly unlikely to be ever truly embraced. In our view,
the nation would rather wait for passage of time and technology to alter domestic productivity,
rather than confront far more unpalatable aspect of structural reforms. In that respect, Japan is not
different to anyone else, except resistance to reforms is generally much greater in Japan.
Similarly, we believe that domestic hostility towards inbound immigration (i.e. freer immigration has
always been suggested by most economists as the most obvious answer to the country’s
demographic challenges) would remain strong. Equally, we believe that Japanese (unlike, say
many Chinese) would continue to strongly prefer residing in Japan, rather than exploring wider
horizons. This historical cultural exclusiveness, while giving a society its cohesion, also limits
opportunities to tap wider and broader options and markets. As discussed in our prior reviews, the
World Wide Values surveys consistently show that Japanese has the lowest level of trust in
foreigners when compared to other developed nations (10% vs 30%+). Again, even as generations
change, we do not believe this ‘island based’ exclusiveness would weaken much.
Normally, economists would argue that an ageing population, an inability to benefit from inbound
immigration and limitations on interchange of ideas or commercialization of inventions, would
condemn a country to a slow death. However, we continue to strongly believe that rapid
technological evolution is leading to a steady but inexorable decline in returns on labour and
conventional capital, while increasing returns on digital capital. Instead of trying to return factories
to Japan (as the Trump administration is trying to do in the US), Japan is building for the future, by
allowing for rapid proliferation of robotics and automation (and after all, TFP does not mind
whether there is a biological mass attached to a given activity) and strengthening its position in
artificial reality, games and AI. Demographics used to be the 'beating heart’ of economies;
alas, this is increasingly no longer true and while Japan is facing a multitude of challenges,
in our view, demographics is not one of them. The same applies to the importance of societal
homogeneity (rather than Western multiculturalism), which is becoming much more important in a
world that is undergoing jarring transition and upheavals.
Homogeneity,
egalitarian wealth
distribution, social
cohesion, innovation &
BoJ are the keys
while…
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 12
What about BoJ and JGBs? We maintain that if Japan were to be a corporate entity, the
Government bonds held by BoJ would have been by now eliminated on consolidation (i.e. it
belongs to the same Government). We believe that the ultimate objective of BoJ’s operations is not
to reflate economy but to eliminate (quietly and over time), the debt burden. While, there is no
doubt that BoJ would need to create some new instruments to enable pricing of long-dated
instruments (such as life policies), it is highly likely that at some stage, investors would wake up to
the fact that 50% of debt essentially no longer exists. In some ways, Japan is actually doing a
‘Debt Jubilee’ (or effective debt forgiveness), which was extensively discussed following the GFC.
While the downside is that zero rates never clear excesses and keep zombie companies
functioning, the upside is that it avoids fracturing societies and economies. In any case, while
Japan was in the past regarded as a unique event (hence, frequent articles like ‘could it happen
here?’ that were written in late 1990s and early 2000s), these days the same forces of
technological disruption and financialization, are driving almost every society towards the
same answer, (i.e. cost of capital can never go up, as economies with low productivity and high
leverage cannot sustain higher rates). Hence, it is not just Japan, but almost everyone (apart from
the least developed economies) that need to debate issues of zero bound rates, dominance of
Central Bank policies, intermingling of fiscal and monetary policies and, yes, debt jubilees.
Japan seem to be now simply ahead of the curve, rather than being an exception to
established rules; and it has far better instruments, historical and societal background to handle
this transition from conventional to unconventional economics.
Fig 40 Real 10Y Bond Yields – all together now…hugging zero bound…
Source: Bloomberg, Macquarie Research, December 2018
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
De
c-9
2
Ja
n-9
4
Feb
-95
Mar-
96
Apr-
97
Ma
y-9
8
Ju
n-9
9
Ju
l-00
Aug
-01
Sep
-02
Oct-
03
No
v-0
4
De
c-0
5
Ja
n-0
7
Feb
-08
Mar-
09
Apr-
10
Ma
y-1
1
Ju
n-1
2
Ju
l-13
Aug
-14
Sep
-15
Oct-
16
No
v-1
7
US Germany Japan UK
Hugging close to zero
…the rest of the world is
converging on Japan’s
model
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 13
Modest expectations and high ROE – a good mix
The above constructive view of Japan’s macro factors complements what appear to be reasonably
conservative investor estimates of earnings, attractive multiples and quite robust ROEs.
Unlike most other jurisdictions (such as MSCI US or MSCI EMs), where we have reservations as
to ability of corporates to deliver (near) double-digit growth rates, in the case of Japan, earnings
expectations are generally quite moderate (~3–5%). Also, unlike most other indices, which have
been recently suffering from growth downgrades, MSCI Japan earnings expectations have
generally been quite stable, with upgrades in energy and utilities offset by downgrades in banks
and technology, with net market EPS estimates for March 2020, up by ~2% when compared to
estimates prevailing in December 2017.
Also, over the last eighteen months, Japan’s corporate ROEs have reached the highest levels
since the mid-1980s of ~10% (vs 4–6% ROEs that prevailed through late 1990s and most of
2000s). While the lower ¥ has clearly played a major part in reflating returns, it has also been
driven by a moderate degree of domestic reflation. Clearly the greatest danger facing corporate
ROEs is a potentially sharp ¥ appreciation, if investors indeed agree with us that Japan’s debt
burden might just one day evaporate (through BoJ write-off).
Finally, if we look at 12 months forward PER, MSCI Japan is currently trading at ~12x earnings,
which is somewhat below historical average of 15x while the Price to Book is only 1.1x-1.2x vs
historical average of closer to 1.4x. In other words, not only do EPS estimates seem reasonable,
market valuations are hardly stretched.
Fig 41 MSCI Japan – EPS growth (%) – Indexed to March (2020 estimates imply a broad equivalent to March 2021)
Fig 42 MSCI Japan – Revenue Growth Rates (%) – Indexed to March (2020 estimates imply a broad equivalent to March 2021)
Source: Thomson; Macquarie Research, December 2018 Source: Thomson; Macquarie Research, December 2018
Fig 43 MSCI Japan – Sectoral EPS – March 2019 – (Dec’16=100)
Fig 44 MSCI Japan – Sectoral EPS – March 2020 – (Dec’17=100)
Source: Thomson; Macquarie Research, December 2018 Source: Thomson; Macquarie Research, December 2018
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Oct-
16
De
c-1
6
Feb
-17
Apr-
17
Ju
n-1
7
Aug
-17
Oct-
17
De
c-1
7
Feb
-18
Apr-
18
Ju
n-1
8
Aug
-18
Oct-
18
2018 EPSg 2019 EPSg 2020 EPSg
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Oct-
16
De
c-1
6
Feb
-17
Apr-
17
Ju
n-1
7
Au
g-1
7
Oct-
17
De
c-1
7
Feb
-18
Apr-
18
Ju
n-1
8
Au
g-1
8
Oct-
18
2018 REVg 2019 REVg 2020 REVg
70.0
90.0
110.0
130.0
150.0
170.0
190.0
210.0
De
c-1
6
Feb
-17
Apr-
17
Ju
n-1
7
Aug
-17
Oct-
17
De
c-1
7
Feb
-18
Apr-
18
Ju
n-1
8
Aug
-18
Oct-
18
MSCI Japan Cons Discretionary
Energy Cons Staples
Banks Tech/IT
Materials T/cm Svs
Indexed EPS for March 2019
95
100
105
110
115
120
De
c-1
7
Ja
n-1
8
Feb
-18
Mar-
18
Mar-
18
Apr-
18
May-1
8
May-1
8
Ju
n-1
8
Ju
l-1
8
Ju
l-1
8
Aug
-18
Sep
-18
Sep
-18
Oct-
18
No
v-1
8
No
v-1
8
MSCI Japan Cons Discretionary
Energy Cons Staples
Banks Tech/IT
Materials T/cm Svs
Indexed EPS for March 2020
Corporates remain in
rude health, with high
ROEs, moderate
expectations and
reasonable multiples
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 14
Fig 45 Datastream Japan – Trailing ROE (%) – the highest since 1980s
Fig 46 Datastream Japan – Trailing Profit Margins (%) – the highest since 1960s-70s
Source: Thomson; Macquarie Research, December 2018 Source: Thomson; Macquarie Research, December 2018
Fig 47 MSCI Japan – Forward PER (x)
Fig 48 Datastream Japan – Trailing Profit Margins (%) – the highest since 1960s-70s
Source: Thomson; Macquarie Research, December 2018 Source: Thomson; Macquarie Research, December 2018
Thus, barring a sudden ¥ appreciation, we believe that Japan equities are generally offering a
better trade-off than most other markets.
This is particularly so given that as discussed in our 2019 preview (here), the degree of uncertainty
facing US (i.e. divided Congress, Trump, untried Fed), Europe (i.e. European elections, changes at
the ECB) or China (i.e. timing, nature and the impact of any policies designed to reflate local
demand and support growth, conducted amidst attempts to rebuild both structure of economy and
society, compounded by trade war and FDI volatilities). As discussed above, we do not believe that
Japan is likely to significantly change either its macro or Central Bank and monetary stance.
Although it does remain a hostage to global cycles, it also has a vibrant selection of companies in
industries with underlying strong global and local drivers, although unlike consensus, we do not
assume that there would be a significant change in corporate governance.
As in the case of our Asia Ex Japan and Global Portfolios, we believe that the only
consistent way to invest, in what is largely an inconsistent world, is to focus on corporates
able to grow without excessively discounting margins while keeping ROEs at a fairly high
level (~12% or above) and without leveraging the balance sheet. We also believe that Japan
has a number of strong consumer domestic stories that do not rely on reflationary pulse (such as
FMCG, or fast moving consumer goods). Working with our colleagues in Japan while also within
our ‘Quality Sustainable Growth’ framework, we have designed a portfolio of Japanese stocks
that we believe best reflects the strengths of Japan, both external and domestic (see below). Some
stocks that have not quite made the cut, but nevertheless, are our team’s favourites include Rengo
(3941 JP), Mitsubishi Motors (7211 JP), Honda (7267 JP), Suntory (2587 JP) and Kirin (2503 JP).
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
De
c-8
0
De
c-8
2
De
c-8
4
De
c-8
6
De
c-8
8
De
c-9
0
De
c-9
2
De
c-9
4
De
c-9
6
De
c-9
8
De
c-0
0
De
c-0
2
De
c-0
4
De
c-0
6
De
c-0
8
De
c-1
0
De
c-1
2
De
c-1
4
De
c-1
6Japan market - ROE
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
De
c-8
0
De
c-8
2
De
c-8
4
De
c-8
6
De
c-8
8
De
c-9
0
De
c-9
2
De
c-9
4
De
c-9
6
De
c-9
8
De
c-0
0
De
c-0
2
De
c-0
4
De
c-0
6
De
c-0
8
De
c-1
0
De
c-1
2
De
c-1
4
De
c-1
6
Japan market - Net margins
0
5
10
15
20
25
30
35
May-0
1
May-0
2
May-0
3
May-0
4
May-0
5
May-0
6
May-0
7
May-0
8
May-0
9
May-1
0
May-1
1
May-1
2
May-1
3
May-1
4
May-1
5
May-1
6
May-1
7
May-1
8
MSCI JAPAN-12m fw PER
+ 1 stdev
- 1 stdev
Average
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
Ja
n-0
4
Ja
n-0
5
Ja
n-0
6
Ja
n-0
7
Ja
n-0
8
Ja
n-0
9
Ja
n-1
0
Ja
n-1
1
Ja
n-1
2
Ja
n-1
3
Ja
n-1
4
Ja
n-1
5
Ja
n-1
6
Ja
n-1
7
Ja
n-1
8
MSCI JAPAN-12m fw PTBV
+ 1 stdev
- 1 stdev
Average
Japan is facing much
lower degree of
uncertainty than either
US, EU or China
We continue to like
domestic and external
sustainability
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 15
Fig 49 Japan – ‘Quality Sustainable Growth’ (QSG) Portfolio
Source: Factset, Macquarie Research, December 2018
Although we have never been fans of backward-looking performance justification, nevertheless,
just for the record, the back-testing of this portfolio would have delivered over the last two years in
excess of 42% outperformance, including 16% outperformance YTD.
Fig 50 Japan – QSG vs the Index Fig 51 QSG Portfolio Relative Performance
Source: Factset; MSCI; Macquarie Research, December 2018 Source: Factset; MSCI; Macquarie Research, December 2018
Ticker Company Name Reco.
Market
Cap
(US$M)
Upside/
Downside
(%)
NTM P/EROE
('18E)
Net
debt/
EBITDA
('18E)
EBITDA
Margins
('18E)
Net
Income
adj
CAGR
(17-19E)
7203 JP Toyota Motor Corp. OP 198,559 26% 8.2 11.8 3.8 12.6 -0.6
6758 JP Sony Corporation OP 66,333 32% 12.1 21.0 -1.1 14.0 7.5
9983 JP FAST RETAILING CO., LTD. N/R 55,522 NA 34.1 19.4 -1.7 13.2 19.0
7974 JP Nintendo Co., Ltd. N/R 41,332 NA 16.2 14.2 -3.9 21.1 38.7
6981 JP Murata Manufacturing Co., Ltd. OP 33,171 37% 13.9 14.0 -0.3 24.9 35.1
7741 JP HOYA CORPORATION OP 23,242 15% 20.5 21.6 -1.4 31.1 11.7
8035 JP Tokyo Electron Ltd. OP 21,293 45% 10.6 28.0 -1.0 26.7 -0.9
8113 JP Unicharm Corporation OP 19,931 35% 30.9 14.6 -1.0 18.9 13.6
2267 JP Yakult Honsha Co., Ltd. OP 13,128 21% 34.2 10.3 -0.3 17.1 9.8
6506 JP Yaskawa Electric Corporation OP 7,750 28% 19.6 17.5 -0.1 14.5 0.9
3769 JP GMO Payment Gateway, Inc. OP 4,615 18% 88.4 18.7 -3.5 28.5 35.8
6268 JP Nabtesco Corporation OP 3,032 35% 15.6 10.3 -0.1 11.1 -5.8
Average 40,659 29% 25.4 16.8 -0.9 19.5 13.7
90
100
110
120
130
140
150
160
170
180
De
c-1
6
Ja
n-1
7
Feb
-17
Mar-
17
Apr-
17
May-1
7
Ju
n-1
7
Ju
l-17
Aug
-17
Sep
-17
Oct-
17
No
v-1
7
De
c-1
7
Ja
n-1
8
Feb
-18
Mar-
18
Apr-
18
May-1
8
Ju
n-1
8
Ju
l-18
Aug
-18
Sep
-18
Oct-
18
No
v-1
8
Japan QSG MSCI Japan
Rebased PricePerformance(Dec 16 = 100)
90
100
110
120
130
140
150
De
c-1
6
Ja
n-1
7
Feb
-17
Mar-
17
Apr-
17
May-1
7
Ju
n-1
7
Ju
l-17
Aug
-17
Sep
-17
Oct-
17
No
v-1
7
De
c-1
7
Ja
n-1
8
Feb
-18
Mar-
18
Apr-
18
May-1
8
Ju
n-1
8
Ju
l-18
Aug
-18
Sep
-18
Oct-
18
No
v-1
8
Japan QSG Price Performance relative to MSCI Japan
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 16
Appendices
Fig 52 Index performance (local currency, unless stated otherwise), %
Note : Priced as of close of 10th of December 2018 Source: MSCI, Thomson, Macquarie Research, December 2018
Fig 53 Index performance by MSCI country and sector (local currency) – Last three months, %
Note : Priced as of close of 10th of December 2018 Source: MSCI, Thomson, Macquarie Research, December 2018
MSCI Indices - 1W - 1M - 3M - 1Y - 3Y - 5Y YTD Index
MSCI AC Asia ex JP (LC) -4.7 -0.6 -6.5 -11.7 19.4 13.9 -13.9 737
ASXJ Consumer Discretionary -6.2 -0.9 -11.7 -25.9 -5.6 -28.0 -29.0 397
ASXJ Consumer Staples -2.2 1.4 -4.1 -3.7 13.9 18.3 -6.5 535
ASXJ Energy -4.8 -4.3 -8.4 5.5 53.5 -0.6 1.5 721
ASXJ Financials -4.5 -1.4 -2.3 -6.9 20.8 18.7 -10.1 345
ASXJ Health Care -7.4 -7.5 -16.7 -5.5 1.4 37.2 -13.6 963
ASXJ Industrials -3.8 1.0 -2.9 -10.0 -5.2 -12.9 -11.8 149
ASXJ Information Technology -6.8 -1.0 -10.3 -17.7 41.4 52.7 -18.2 449
ASXJ Materials -3.7 -1.8 -8.7 -10.1 30.2 4.4 -14.0 345
ASXJ Utilities -1.5 0.8 -2.5 0.0 9.3 10.3 -0.4 233
ASXJ Telecom Svcs -3.5 1.1 -1.9 -8.8 -10.8 -9.5 -10.8 122MSCI AC ASIA EX JP U$ -5.2 -0.3 -6.2 -13.7 20.7 7.2 -16.4 596
MSCI CHINA U$ -5.9 1.2 -3.9 -15.7 22.6 11.1 -18.2 72MSCI HONG KONG U$ -4.2 2.6 -1.6 -8.2 16.3 14.4 -11.7 10,906MSCI INDIA U$ -5.5 -0.7 -8.9 -10.6 20.2 27.6 -14.2 524MSCI INDONESIA U$ -2.2 5.2 10.5 -7.6 26.8 18.4 -12.7 799MSCI KOREA U$ -5.4 -3.0 -10.1 -20.3 21.7 -2.4 -22.2 431MSCI MALAYSIA (EM) U$ -2.2 -2.4 -8.9 -6.0 2.2 -33.1 -11.0 342MSCI PHILIPPINES U$ -3.3 6.2 -1.3 -15.3 -5.7 4.5 -19.2 489MSCI SINGAPORE U$ -4.3 -0.6 -1.9 -12.6 10.2 -11.8 -13.5 3,589MSCI TAIWAN U$ -6.1 -3.9 -13.0 -11.1 24.0 13.6 -13.5 326MSCI THAILAND U$ -1.8 0.1 -1.4 -0.5 51.3 20.5 -4.0 456
MSCI China -5.9 1.0 -4.2 -15.6 23.5 11.9 -18.2 73
MSCI Hong Kong -4.2 2.4 -2.1 -8.1 17.2 15.3 -11.8 15,339
MSCI India -4.1 -2.1 -10.2 -1.0 28.5 49.2 -4.1 1,214
MSCI Indonesia -0.1 4.3 8.2 -0.7 32.4 43.8 -6.3 7,044
MSCI Korea -4.1 -3.1 -10.2 -17.8 16.1 4.5 -18.2 613
MSCI Malaysia -2.1 -2.6 -8.2 -4.0 0.0 -12.9 -8.3 574
MSCI Philippines -2.4 5.9 -3.3 -11.5 5.5 24.5 -14.5 1,241
MSCI Singapore -3.9 -0.9 -2.3 -11.2 8.1 -3.1 -11.1 1,603
MSCI Taiwan -5.7 -3.7 -12.9 -8.5 16.6 18.7 -10.3 353
MSCI Thailand -1.7 -0.6 -1.5 -0.1 37.9 23.0 -3.4 599
MSCI USA -5.5 -5.1 -8.5 -0.6 28.2 45.6 -1.4 2,509
MSCI AC WORLD U$ -5.5 -4.9 -8.4 -6.7 17.7 17.9 -8.3 470
MSCI EM U$ -5.3 -1.4 -4.8 -13.3 22.0 -4.9 -16.9 963
MSCI WORLD U$ (Dev) -5.5 -5.3 -8.9 -5.8 17.4 21.0 -7.2 1,953
MSCI EM ASIA U$ -5.4 -0.6 -6.9 -14.5 22.1 7.5 -17.2 486
MSCI WORLD EX JP ($) -5.5 -5.5 -9.0 -5.4 18.2 21.9 -6.7 1,976
MSCI EUROPE U$ -5.9 -7.0 -11.0 -15.5 -2.4 -11.9 -17.3 1,486
MSCI EMU U$ -6.2 -6.9 -12.4 -18.2 0.6 -8.3 -18.5 173
MSCI AC Asia ex JP
AC
Asia
ex JP
China HK India Indo Korea Mal Phils Sing TW Thai EMG World
(Dev)
Japan
AC
World
MSCI Country Index -6.5 -4.2 -2.1 -10.2 8.2 -10.2 -8.2 -3.3 -2.3 -12.9 -1.5 -5.7 -8.2 -5.4 -8.0
Cons. Disc -11.7 -11.7 -4.4 -18.4 8.1 -13.7 -33.2 4.5 -1.8 -3.5 -0.6 -11.8 -9.3 -4.7 -9.5
Staples -4.1 -9.5 1.6 -1.9 9.2 -6.8 -6.3 -16.3 0.2 -9.5 3.6 -5.2 -1.8 0.5 -2.1
Energy -8.4 -6.9 NA -12.8 -14.6 -8.3 -5.7 0.0 0.0 -9.2 -2.5 -1.9 -11.6 -12.1 -10.3
Financials -2.3 -0.6 -2.6 -7.7 12.2 -6.6 -2.3 2.4 -2.3 -4.8 -4.4 0.3 -11.3 -6.2 -9.6
Banks -3.3 -1.5 -14.8 -7.4 12.2 -8.6 -2.3 6.6 -2.3 -4.3 -4.4 0.9 -12.7 -8.3 -10.0
Real Estate -0.8 -0.7 0.0 NA 16.5 NA -15.6 -2.6 -1.6 -0.5 -7.6 -2.5 -0.5 4.9 -0.7
Health Care -16.7 -23.4 NA -19.8 29.0 -12.0 -3.5 NA 0.0 -22.0 4.2 -16.6 -2.5 -5.5 -2.9
Industrials -2.9 1.4 -4.4 -1.7 0.4 -6.0 -12.1 -6.9 -2.3 -2.1 3.2 -2.6 -11.7 -4.8 -11.2
IT -10.3 -6.4 -4.7 -7.4 NA -12.3 -31.9 0.0 -12.9 -17.2 -0.7 -10.4 -11.7 -11.0 -11.6
Materials -8.7 -6.3 0.0 -10.8 -2.5 -10.5 -2.3 0.0 NA -10.1 -0.9 -9.5 -10.4 -9.3 -10.2
Utilities -2.5 1.3 -1.8 -11.6 3.5 4.0 -10.9 -5.8 NA NA -1.0 1.0 2.1 9.2 2.0
Telecom Services -1.9 0.2 17.0 -22.9 6.6 4.9 -9.8 -11.1 -2.1 -1.0 -8.9 -2.2 -0.8 -10.5 -1.0
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 17
Fig 54 Valuations – Asia ex JP and key comps
Note : Priced as of close of 10th of December 2018 Source: MSCI, Thomson, Macquarie Research, December 2018
Fig 55 Macquarie – Country allocation tilts
Source: Macquarie Research, December 2018
Avg since 2010
MSCI Indices PER P/B EPS gr ROE DY PER P/B ROE DY PER P/B
MSCI AC Asia ex JP 11.2 1.3 9.0 11.7% 3.1% 12.0 1.6 12.7% 2.9% 11.8 1.5
ASXJ Consumer Discretionary 13.1 1.4 18.4 10.5% 2.5% 11.6 1.8 14.8% 2.3% 12.0 1.7
ASXJ Consumer Staples 21.6 2.8 8.4 13.0% 2.2% 17.0 2.7 15.0% 2.3% 19.7 2.8
ASXJ Energy 9.6 1.2 10.4 12.1% 4.4% 10.2 1.6 13.8% 3.2% 10.7 1.3
ASXJ Financials 8.9 1.0 11.2 11.7% 3.8% 11.6 1.3 11.4% 3.3% 10.1 1.2
ASXJ Health Care 25.7 3.4 19.4 13.2% 0.9% 19.7 3.3 15.3% 1.1% 22.7 3.3
ASXJ Industrials 10.6 1.0 11.5 9.1% 2.8% 13.0 1.4 10.4% 2.5% 12.6 1.2
ASXJ Information Technology 12.5 2.0 3.3 16.1% 2.3% 13.3 2.0 16.0% 2.1% 12.6 2.0
ASXJ Materials 9.6 1.0 4.1 10.9% 3.9% 10.6 1.3 12.4% 3.2% 11.8 1.3
ASXJ Utilities 13.6 1.2 16.1 9.0% 3.4% 12.5 1.4 10.6% 3.3% 12.9 1.4
ASXJ Telecommunication Services 16.0 1.5 3.4 9.4% 4.1% 13.4 2.0 14.3% 4.0% 14.2 1.8
MSCI China 10.5 1.4 14.1 13.2% 2.8% 11.6 1.7 14.5% 2.9% 10.5 1.5
MSCI Hong Kong 13.6 1.1 9.3 8.1% 3.5% 15.4 1.4 8.5% 3.2% 14.9 1.2
MSCI India 17.5 2.5 22.3 14.5% 1.7% 14.9 2.7 16.2% 1.6% 15.9 2.5
MSCI Indonesia 14.5 2.4 11.7 16.3% 2.9% 11.9 2.8 20.4% 3.1% 14.2 2.8
MSCI Korea 7.8 0.9 2.6 11.0% 2.8% 9.3 1.2 12.1% 1.7% 9.2 1.1
MSCI Malaysia 15.5 1.5 5.4 9.8% 3.4% 14.6 1.8 12.3% 3.5% 15.1 1.8
MSCI Philippines 15.9 1.9 11.9 11.8% 1.8% 15.4 2.2 14.0% 2.4% 17.1 2.5
MSCI Singapore 11.7 1.1 6.8 9.7% 4.7% 14.0 1.5 10.5% 3.7% 13.2 1.3
MSCI Taiwan 12.6 1.5 1.4 12.2% 4.8% 13.9 1.7 13.0% 3.9% 13.3 1.7
MSCI Thailand 13.7 1.8 6.4 12.8% 3.3% 11.4 1.8 15.5% 3.7% 12.6 1.9
MSCI EMG 10.6 1.3 9.9 12.7% 3.4% 10.9 1.6 14.0% 3.0% 11.0 1.4
MSCI World (Dev) 14.5 2.1 8.6 14.7% 2.7% 14.8 1.9 13.6% 2.7% 14.3 1.9
MSCI AC World (All) 13.9 2.0 8.8 14.4% 2.8% 14.4 1.9 13.6% 2.8% 13.8 1.8
MSCI Japan 12.1 1.2 3.4 9.6% 2.5% 16.4 1.3 8.6% 1.8% 13.7 1.1
MSCI USA 15.9 3.0 9.6 18.6% 2.1% 15.5 2.4 15.8% 2.1% 15.1 2.4
MSCI Australia 14.1 1.8 4.2 12.5% 5.4% 14.2 2.0 13.9% 4.7% 14.0 1.8
12 Month forward estimates LT Average (12M forward ests)
-3 -2 -1 0 1 2 3
China
India
Korea
Taiwan
Singapore
Hong Kong
Malaysia
Philippines
Thailand
Indonesia
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 18
Recent Equity Strategy Research
What caught my eye? v.101 – In praise of ‘draining the swamp’ 4 Dec 2018 From Bear to Bull and Back – Neutral Rate, PMIs and ‘jaw-to-jaw 4 Dec 2018 Craftsmen in a World of Factories – Do we still need fundamentals? 22 Nov 2018 Rights, Wrongs & Returns 2019 – Tragedy, Farce or Both? 21 Nov 2018 Between Blue and Red Waves – Populism survived and it is just the beginning 7 Nov 2018 Living in a Matrix – Flashes in the sky and what drives them 31 Oct 2018 What caught my eye? v.100 – Retrospective 15 Oct 2018 EM bond markets contagion – Limited thus far; next tremor might be worse 12 Oct 2018 Technology sell-off and cost of capital – What would you fund? The future or the past? 10 Oct 2018 China Fears and Minsky Moments – It will never be a conventional free economy 10 Oct 2018 Macquarie Global Strategy Presentation – A twilight world of trade wars & recessions 9 Oct 2018 What to look for as volatilities rise? – Inflation and Fed’s responses are the key 8 Oct 2018 EMs in the crosshairs – Between war games, fake news and bonds 5 Oct 2018 Global Liquidity Eroding – But nothing is breaking yet 28 Sep 2018 What caught my eye? v.99 – China: competing, complementing, innovating 27 Sep 2018 Rising regulatory & political burden – How will corporates respond? 12 Sep 2018 Where would the next shoe drop? – How much should we worry about India? 7 Sep 2018 What caught my eye? v.98 – Demographic tsunami: where would they go? 5 Sep 2018 What happens when all doors are closed? – Catching falling knives & EM contagion 5 Sep 2018 Towards Singularity – Investment Rules for Disrupted World 20 Aug 2018 What can kill SPX? Any relief for EMs? – Watch trade & US$ blowback for signals 17 Aug 2018 The world remains on US$ leash – Triffin paradox, forecasting & Turkey 15 Aug 2018 What caught my eye? v.97 The centre cannot hold; ‘going to mattresses’ 14 Aug 2018 Emerging markets at crossroads – Are politics & economics on a suicide course? 13 Aug 2018 Are higher savings good news? Either it is an error or it might be a problem 3 Aug 2018 What caught my eye? v.96 – The curious case of India vs Philippines 2 Aug 2018 Corporates – innovators vs just average – All winnings go to the winner; it won’t stop 18 Jul 2018 Rights, Wrongs & Returns – A twilight world of trade wars & recessions 17 Jul 2018 Trade Wars & Profits – Have we seen the peak of corporate returns? 9 Jul 2018 EM Equities – may be a pleasant summer How likely is a short-term dead-cat bounce? 29 Jun 2018 The extreme left meets extreme right – How do markets react to exceptional events? 28 Jun 2018 What caught my eye? v.95 – On Labour, Wages, CEOs & Capital 26 Jun 2018 Should investors worry about recession? – It all depends on liquidity & China 26 Jun 2018 Trump, Kim or Powell? - Liquidity, inflation & China; ignore the rest 20 Jun 2018 Are we running out of policy tools? Slaves of some defunct economist 20 Jun 2018 What caught my eye? v.94 – What if China suddenly disappeared? 5 June 2018 Eurozone contagion – Prisons are quiet until inmates riot 29 May 2018 What caught my eye? v.93 – Investment Purgatory: equities flutter & wait 29 May 2018 When should one nullify elections? – On Huey, ‘smoke filled rooms’ and Italy 28 May 2018 Identity Politics, economics & Markets – Why identity is almost irreversible? 15 May 2018 What caught my eye? v.92 – Trade deals need a fall guy. Who will it be? 15 May 2018 What caught my eye? v.91 – Indonesia – secular, cyclical or neither? 8 May 2018 US$ and its discontents – Liquidity, CA deficits, deflation & EMs 7 May 2018 What caught my eye? v.90 – Globalization and nations: can they coexist? 23 Apr 2018 Rights, Wrongs & Returns – Impotence of noise; importance of liquidity 18 Apr 2018 The tech sell-off – what happened to our portfolios? 3 Apr 2018 Are canaries still singing? – Rising plumbing pressures 29 Mar 2018 The end of liberal order – de-globalization drift; but no wars, yet 27 Mar 2018 What caught my eye? v.89 – What do EM market internals tell us? 16 Mar 2018 Volatilities & Contagion – All Quiet on the Western Front 12 Mar 2018 What caught my eye? v.88 – Bukharin, NEP, Hayek, China & AI 9 Mar 2018 Tariffs, Elections & CEOs – Unorthodox minds in disrupted world 5 Mar 2018 What caught my eye? v.87 – Inflationary note in a deflationary tune 21 Feb 2018
Importance of ironclad laws – US administration & sectoral balances 13 Feb 2018 CBs & asset-based world – can we survive a return to normality? 6 Feb 2018 Macro contagion risks – Is it a ‘flutter’ or a deadly heart attack? 5 Feb 2018 Consumer of last resort – Music, deficits, dissaving and low US$ 29 Jan 2018 What caught my eye? v.86 – Volatilities: from masters to slaves 26 Jan 2018 Global Tech Giants – Frogs in boiling water? 22 Jan 2018 Why history matters – Henry Ford, dot.com & bitcoins 11 Jan 2018 Break with the past? – Bonds: The king is dead; long live the king 10 Jan 2018 What caught my eye? v.85 – EMs – divergence is likely to deepen 8 Jan 2018 Slow burn default – Mean reversion is not coming back 19 Dec 2017 What caught my eye? v.84 – China – Perception & Reality 7 Dec 201 What caught my eye? v.83 – The agonizing death of corporates, 21 Nov 2017 Rights, Wrongs & Returns, 2018 – Year of choices & consequences 14 Nov 2017 Portfolio update – out with the old, in with the new 1 Nov 2017
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 19
CBs vs. markets – Can CBs shift the entire yield curve? 27th Oct 2017 Comrades-in-arms – Parallel but different lives 27 Oct 2017 What caught my eye? v.82 – Looking through India’s fog 13 Oct 2017 Ready for Battle - Stocks to watch this earnings season 10 Oct 2017 World without risk - Loose liquidity and no risks anywhere 9 Oct 2017 US Policy landscape - Much ado about nothing 28 Sep 2017 What caught my eye? v.81 - Between Bitcoin, seashells and US$ 28 Sep 2017 What caught my eye? v.80 - Japan Debt Mountain: does it matter? 22 Sep 2017 Why equities are different - The old value vs. growth dilemma 14 Sep 2017 What caught my eye? v.79 - Army mutiny & default – no problems 8 Sep 2017 Korea et al - Rational investing in an irrational world 5 Sep 2017 Asia MicroStrategy - 2Q/17 earnings – what did we learn? 4 Sep 2017 Undying desire for normality - Travel notes: need to replace idols 18 August 2017 Asia MicroStrategy - Most loved and hated stocks in Asia ex (II) 11 August 2017 Technology & bubbles - Would you buy tech on any pullback? 1 August 2017 What caught my eye? v.78 - How long would tranquil autumn last? 24 July 2017 Rights, Wrongs & Returns - CBs – can slaves become masters? 18 July 2017 Ready for Battle - Stocks to watch this earnings season 10 July 2017 Cambrian explosion - Birth of the new; extinction of the old 10 July 2017 What caught my eye? v.77 - EMs – calm waters or storm ahead? 29 June 2017 Impossibility of tightening - Opioids – prescribed by CBs & China 21 June 2017 One Belt One Road (OBOR) - Selfish yet enlightened Marshall Plan 15 June 2017 What caught my eye? v.76 - The world of no wages 14 June 2017 Thematic Portfolios - On Bread & Circuses 9 June 2017 Asia MicroStrategy - What will corporates do with $2.5trn? 8 June 2017 The world’s largest industry - Capital manufacturing Capital 22 May 2017 What caught my eye? v.75 - India: is it more than just liquidity? 12 May 2017 Who is driving reflation? - China is out; it is all up to the US 5 May 2017 Thematics Portfolio - Why Amazon and not Apple? 24 April 2017 Ready for Battle - Stocks to watch this earnings season 20 April 2017 Rights, Wrongs & Returns - 2H’17 – Clash of the Titans 11 April 2017 What caught my eye? v.74 - China – Atlas holding up the sky 24 March 2017 Money rollercoaster - Dumb money, smart money and AI 3 March 2017 What caught my eye? v.73 - Is higher uncertainty = higher growth? 2 March 2017 Asia MicroStrategy - Earnings recovery. Is it sustainable? 23 Feb 2017 ‘Danse Macabre’ - Strong leaders, US$ and gold 21 Feb 2017 Bond vs. Equity markets - Little reflation in one; a lot in another 21 Feb 2017 What caught my eye? v.72 - Surfing debt wave. Don’t look down! 16 Feb 2017 Reflationary theme - Is it peaking? We think so 16 Feb 2017 What caught my eye? v.71 - Investing in a policy & twitter blizzard 8 Feb 2017 What caught my eye? v.70 - Eurozone’s Achilles’ heel 19 Jan 2017 Ready for Battle - Stocks to watch this earnings season 12 Jan 2017 What caught my eye? v.69 - Is China on the wrong side of history? 5 Jan 2017 What caught my eye? v.68 - Is it time for quality, growth or value? 20 December 2016 Fed’s dilemmas - Binary outcomes and fat tails 15 December 2016 What caught my eye? v.67 - Populism = Stagflation & Poor return 7 December 2016 Strategy for the New World - Changing Landscape & Investment Rules 6 Dec 2016 Asia MicroStrategy - The Yield curveball 24 November 2016 Rights, Wrongs & Returns - 2017– State reflation or stagflation? 15 November 2016 Dawn of a new age - Populism rules. Status quo – R.I.P. 9 November 2016 DXY & Markets - Has the link been broken? 3 November 2016 What caught my eye? v.66 - Is it reflation, stagflation or twilight? 27 October 2016 Ready for Battle - Stocks to watch this earnings season 12 Oct 2016 What caught my eye? v.65 - Is China ‘a shining city upon a hill’? 7 October 2016 MicroStrategy - Buy & sell side: Most loved & hated stocks 26 September 2016 Markets & US elections - Donald or Hillary, does it matter? 13 September 2016 What caught my eye? v.64 - Could strong DXY be good for EMs? 9 September 2016 In JFK’s footsteps - Mars, communism, fascism or war 1 September 2016 What caught my eye? v.63 - Deconstructing SPX – mind the GAAP 25 August 2016 Twilight - where to now? - ‘Damned Volcker’ and equities 16 August 2016 EM Equities ‘Goldilocks’ - It is all about US10Y & DXY 12 August 2016 What caught my eye? v.62 - Thailand & coups – any benefit? 11 August 2016 Policy cross-roads - Is it the end of monetary activism? 1 August 2016 What caught my eye? v.61 - ‘Lumpenproletariat’ & deglobalisation 20 July 2016 Rights, Wrongs & Returns - 2H16 – Investment Twilight zone 15 July 2016 Investment twilight - Between ignorance & confusion 12 July 2016 Ready for Battle - Macquarie earnings survivors’ guide 6 July 2016 MicroStrategy - Beyond Brexit, back to Asian fundamentals; where to from here? 29 June 2016 Brexit et al - It is all about 2nd derivatives & CBs 24 June 2016 What caught my eye? v.60 - Parallel lives: Japan vs. China 23 June 2016 What caught my eye? v.59 - In praise of Thematics 7 June 2016
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 20
What caught my eye? v.58 - Divergence, convergence & confusion 24 May 2016 What caught my eye? v.57 - Portfolios: The case of less is more 17 May 2016 What caught my eye? v.56 - Capital – Time for a vegetarian diet? 11 May 2016 What caught my eye? v.55 - Why are we staying in China & India? 29 April 2016 Ready for Battle - Macquarie earnings survivors’ guide 21 April 2016 Rights, Wrongs & Returns - Year of Living dangerously – sequel 13 April 2016 Central Banks & Markets - Mutually assured destruction 31 March 2016 Global Travel Notes - The blind leading the blind 29 March 2016 MicroStrategy - Earnings season – A letdown so far but there is a silver lining 22 March 2016 What caught my eye? v.54 - Negative rates and the war on savers 2 March 2016 What caught my eye? v.53 - Philippines shelter; CBs calling E.T 23 February 2016 Is it a policy dead-end? - Consistency in an inconsistent world 11 February 2016 What caught my eye? v.52 - Launching global portfolios 4 February 2016 Central Banks - Why insistence on failed policies? 1 February 2016 China’s hard landing - Has it already happened? 27 January 2016 What caught my eye? v.51 - Bulls, Bears and low rates 22 January 2016 What caught my eye? v.50 - The Fed and the need for redemption 11 January 2016 MicroStrategy – Growth it is - Five reasons we prefer Growth over Value 8 January 2016 China choices – narrowing - Between a rock and a hard place 7 January 2016 What caught my eye? v.49 - China’s savings dilemma 4 January 2016 Fed hikes. What now? - Implications for EM equities 17 December 2015 20 YEARS IN ASIA 14 December 2015 Is it Bear Stearns moment? - Year of living dangerously, part II 14 December 2015 Rights, Wrongs & Returns - 2016 - Year of living dangerously 25 November 2015 Policy cross-currents - What would unhinge PBoC? 12 November 2015 Bihar dreaming - On impossibility of reforms 9 November 2015 What caught my eye? v.48- EMs – downside to the upside, 3 November 2015 What caught my eye? v.47- The more they do; the worse it gets, 27 October 2015 What caught my eye? v.46-Equities – irrational exuberance?, 8 October 2015 Time for a policy U-turn? - Back to the future: British Leyland, 18 September 2015 What caught my eye? v.45 - Today is more insidious than 1997, 16 September 2015 Old Friend Deflation is Back - From traders to shareholders, 25 August 2015 EM vs DM Equities - What would the average opinion say?, 20 August 2015 Deflators of the world unite - Impact on the US & Global PPIs, 17 August 2015 China’s dilemma - Between a rock and a hard place, 13 August 2015 Return of deflationary vortex - Commodities – canary in a coalmine?, 10 August 2015 What caught my eye? v.44 - Barbarians at the gate, 5 August 2015 China’s policy response - How different is it to G4 economies?, 20 July 2015 Rights, Wrongs & Returns - 2H–Falling knives & deflating bubbles, 13 July 2015 Are dominos finally falling? - Greece, Puerto Rico, China, 6 July 2015 What caught my eye? v.43 - Why consumer & business reticence?, 29 June 2015 China drama & Greek farce - Are CBs at the end of the road?, 29 June 2015 What caught my eye? v.42 - Resisting China; Asia ex earnings, 17 June 2015 Trade & Cyclicality - Stagnation in both = lower yields, 28 May 2015 What caught my eye? v.41 - China & Global Manufacturing, 27 May 2015 What caught my eye? v.40 - CBs vs deflation: will liquidity win?, 8 May 2015 What caught my eye? v.39 - China & Indonesia: Binary outcomes, 29 April 2015 What caught my eye? v.38 - When size does not matter, 13 April 2015 Rights, Wrongs & Returns - 2Q-3Q’15 - The Hall of Mirrors, 27 March 2015 Global Liquidity Watch - Return of Greenspan’s conundrum?, 10 March 2015 What caught my eye? v.37 - India hope is still intact; travel notes, 5 March 2015 Chasing dividends - No mean reversion = desire for yield, 13 Feb 2015 What caught my eye? v.36 - Secular stagnation & four horsemen, 6 Feb 2015 Global liquidity watch - Liquidity tight but should improve, 27 Jan 2015 What caught my eye? v.35 - Focus on Thailand; CBs’ effectiveness, 26 Jan 2015 What caught my eye? v.34 - Trade & Flow watch; A vs H shares, 8 Jan 2015 Is deflation almost here? - What do DXY & bonds tell us, 6 Jan 2015 Global contagion risks - Commodities: canary in a coal mine?, 17 Dec 2014 China A retail exuberance - Damned if you do and damned if you don’t, 9 Dec 2014 Global Liquidity Watch - Eroded in 3Q’14 & Oct/Nov, 8 Dec 2014 Rights, Wrongs & Returns - 2015 preview: the “known unknowns”, 2 Dec 2014 How exposed is Korea? - Yen “doomsday machine”, 17 November 2014 What caught my eye? v. 33 - Currency wars & their discontents, 13 November 2014 What caught my eye? v.32 - On social upheavals, schools & robots, 30 October 2014 What caught my eye? v.31 - Is China in a liquidity trap? EM risks, 16 October 2014 What caught my eye? v.30 - EM vulnerabilities; U/W Indonesia, 9 October 2014 What caught my eye? v.29 - China’s city vs global city, 18 September 2014 What caught my eye? v.28 - Unstoppable China; EM equity rally, 9 September 2014 Global Liquidity - Most measures are looking better, 21 August 2014 ASEAN at the crossroads - Complex choices; uncertain outcomes, 18 August 2014 Phils – Fading optimism - ST concerns overshadow LT story, 31 July 2014
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 21
What caught my eye? v.27 - Importance of Trust; China’s rerating, 29 July 2014 Trade – Waiting for Godot - Small pick-up but no robust cyclicality, 18 July 2014 Rights, Wrongs & Returns - Higher rates or perhaps no rates, 15 July 2014 What caught my eye? v.26 - Oil, geopolitics & family formation, 3 July 2014 What caught my eye? v.25 - Value - many ways to skin a cat, 23 June 2014 What caught my eye? v.24 - Financial stability & catch 22, 13 June 2014 What caught my eye? v.23 - Reforms: who will & who will not, 30 May 2014 What caught my eye? v.22 - Upgrades and stagflations, 21 May 2014 Coups & Martial laws - Not necessarily a bad choice, 20 May 2014 What caught my eye? v.21 - China tourism; Portfolio update, 12 May 2014 What does FIC market tell equity investors? - All quiet on the Western front, 9 May 2014 What caught my eye? v.20 - Investments & geopolitical risks, 29 April 2014 What caught my eye? v.19 - Liquidity in its various forms, 16 April 2014 Rights, Wrongs & Returns - Policy errors, cyclicality & EM volatility, 28 March 2014 FOMC – Impact on EMs - Higher US$, rates and lower demand, 20 March 2014 Difficult case of Indonesia - Euphoria vs. terms of trade & liquidity, 17 March 2014 What caught my eye? v.18 - Is China unravelling? Not Yet, 11 March 2014 “Each unhappy family is unhappy in its own way” - Ukraine, Thailand, Argentina, et al, 3 March 2014 DM vs. EM push & pull - Beware what you wish for, 26 February 2014 Bond Yields & Equities - The question of foreign demand, 24 February 2014 What caught my eye? v.17 - Is the Philippines for real?, 24 February 2014 What caught my eye? v.16 - Third industrial revolution & its impact, 12 February 2014 What caught my eye? v.15 - Investment Cycles & Funds Flows, 17 January 2014 Liquidity trap vs. Stagflation - China vs India – tough choice, 15 January 2014 What caught my eye? v.14 - Would Indian corporates invest?, 6 January 2014 Tapering is on, so is the put - What is likely to happen to volatilities?, 19 December 2013 Investment Outlook – 2014 - “Out with the old and in with the new” Is it 1998 or 1999 – Buy all or Sell all?, 11 December 2013 What caught my eye? v.13 - China's savings conundrum & Plenum, 25 November 2013 What caught my eye? V.12- Hardware vs software; China's "divide & conquer” reform agenda?, 6 November 2013 What caught my eye? v.11 - Leading indicators and “blind alleys”, 28 October 2013 What caught my eye? v.10 - Corporate leverage – how much of a problem?, 3 October 2013 Asia Strategy - When you rely on asset bubbles, what else do you do?, 19 September 2013 What caught my eye? v.9 - Rmb: How exposed is China?, 18 September 2013 What caught my eye? v.8 - In and out of “shadows”, 6 September 2013 What caught my eye? v.7 - If something cannot go on forever, it will stop, 22 August 2013 ASEAN 4 – risks & returns - Kaleidoscope of themes, 16 August 2013 What caught my eye? v.6 - China industrial sector – the Good, the Bad and the Ugly, 31 July 2013 Reviewing Tactical Portfolio - Tough choices: damned if you do and damned if you don't in a slowing world, 10 July 2013 What caught my eye? v.5 - Liquidity – receding tide, 5 July 2013 What caught my eye? v.4 - Central Bank’s “chicken run”, 27 June 2013 What caught my eye? v.3 - QEs to eternity whether successful or not, 12 June 2013 What caught my eye? v.2 - Korea - is China or Japan a greater threat?, 29 May 2013 What caught my eye? - Inflation falling everywhere, 22 May 2013 Rights, Wrongs & Returns - Bears and the Investment Clock, 24 April 2013 DXY rises and Yen falls - The pincer movement for EM equities, 8 April 2013 APAC – Competitive Edge - Separating winners from losers, 21 March 2013
Walk on the wild side - Macro threats - what, if and when 3 March 2013
Macquarie Wealth Management What caught my eye? v.102
12 December 2018 22
Important disclosures:
Recommendation definitions
Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield, which is currently around 9%.
Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Mazi Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return
Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return
Volatility index definition*
This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only
Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations
Financial definitions
All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).
Recommendation proportions – For quarter ending 30 September 2018
AU/NZ Asia RSA USA CA EUR Outperform 51.56% 59.51% 45.05% 46.88% 67.86% 46.70% (for global coverage by Macquarie, 3.70% of stocks followed are investment banking clients)
Neutral 33.20% 28.92% 37.36% 47.70% 25.00% 42.73% (for global coverage by Macquarie, 2.04% of stocks followed are investment banking clients)
Underperform 15.23% 11.57% 17.58% 5.42% 7.14% 10.57% (for global coverage by Macquarie, 0.47% of stocks followed are investment banking clients)
Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.
Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN 58 002 832 126, AFSL 238947, a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN 41 002 574 923 AFSL 237504 ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Apart from Macquarie Bank Limited ABN 46 008 583 542 (MBL), any MGL subsidiary noted in this research, , is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures © Macquarie Group
This publication was disseminated on 12 December 2018 at 07:13 UTC.