The cyclical heavy Japanese equity markets continued the rally in March, in line with the global optimism on the global economic recovery, despite weaker local economy and the seemingly worsening pandemic situation. The risk-on sentiment sent fund out of the safe haven of Japanese Yen, and the Dollar grew stronger partly on the back on rising yield. Over the month, Nikkei 225 was up by 0.73% (-2.87% in US$ terms), while the TOPIX index gained 4.80% (1.05% in US$ terms).
Economic data in the country do remain on the weaker end, as we noted that the household spending figures remain in a contraction YoY, which was expected with the hike in GST and the expiry of government handouts. Retail sales and industry production also stayed negative, in line with the continuously contracting services PMI, although manufacturing PMI still climbed higher, reassuring cyclical bettors. Driven by market capital flows, cyclicals such as consumption, auto, and finance helped support the market.
However, the epidemic situation is seemingly on a resurgence in the country since the beginning of March. The increasing threat of the virus concerns local governments, Osaka have decided to take the Olympic Torch Run off public roads. Overall, the virus still has a stranglehold on the country after more than a year of outbreak, haunting the local economy with the near complete halt in tourism dollars. While the current outlook on cyclicals remains positive, the mid to long term growth prospects of the Japanese market remains lacklustre, and we would be more hesitant to overweigh them in the portfolio.