Update on Japan’s “Show me the Money” corporate governance — the dividend paid by TOPIX continues to rise towards its historic high, but the payout ratio has been stagnant for the past few months, as earnings continue to rally equally well.
Our house view is that non-economic factors played the largest role in the recent market turbulence. We discuss these below and forecast their future development.
Much as we expected, China’s economy has continued to slow faster than consensus, but does not appear to be in a hard landing.
Improving the number of independent directors and other governance issues are very important in the intermediate term for Japan, but it is crucial for investors to understand that much of the profitability message has already been understood by Japanese corporate for nearly a decade.
Japan’s pipeline inflation, which we measure using the recently renamed Producer Price Index’s Finished Consumer Goods for Domestic Demand sub-component continued to be quite depressed in August.
Japan’s 2Q GDP growth, at -7.1% QoQ SAAR, was far below June’s consensus of -3.1% (and our -2.5% estimate) and we need to reduce our CY14 forecast, but not by much and we remain more optimistic than consensus.
Although not a Goldilocks scenario, our forecasted macro-backdrop is quite positive for global equities.
G-3 bond yields rose less than we predicted, mostly due to continued ECB aggressiveness, worries about the Chinese economy and the decline in oil prices.
Sentiment about Fed policy remains very volatile, but Yellen has remained remarkably stable in her outlook and bond prices have remained under control during the transition away from ultra-accommodative levels.
Nikko AM’s Global Investment Committee met on September 26th and updated our house view on the global economic backdrop, financial markets and investment strategy advice. In sum, there certainly are some worrisome issues, as always, but we find none of them convincing enough to halt the upward momentum in equity prices.
Domestically produced goods and imported finished consumer goods both rose mildly MoM. This must be causing much doubt at the BOJ about achieving the 2% Core CPI target.
As for the entire Eurozone, its trade surplus in goods and services remains near record highs, but it is not increasing further, so it is no longer supportive of GDP growth.
Regarding our long-standing theme of rebalancing in the Eurozone, recent trends have been more negative, so we offer this summary with some relevant charts.
Last month we described Japan’s “Show me the Money” corporate governance as regards the sharp rise in corporate profit margins to new highs. This theme is paralleled by the trend in dividend payments.