Ninepoint International Small Cap Fund Market View

May 01, 2020

Dear Clients and Colleagues:

The number of COVID-19 cases in Japan has surpassed 14,000, and nearly 400 deaths have been recorded. These are relatively small numbers for a population of over 126 million people, of which 28% are seniors. However, given that only 10,000 tests per day are being conducted, that might be contributing to a lower number of reported cases therefore low fatality rate should be noticed. In the United States (US), fatalities per population are 50 times Japan’s, while the United Kingdom’s (UK) are 105 times and Belgium’s are 207 times. In this weekly, we look into the Japanese model of COVID-19 control, its stimulus measures and share our view on the market.

No Mandatory Lockdown

Japan declared a national state of emergency on April 16. It will remain in place until May 6, and there is a strong likelihood that it will be extended.

It is very important to highlight that there is no mandatory lockdown in Japan. The imposed state of emergency gives governors the authority to request that people stay home and businesses close. But with no penalties for ignoring these requests, enforcement relies more on peer pressure and respect for authority. The government suggested people reduce their contact with others by 70 to 80% and encouraged companies to reduce business hours or close altogether. Restaurants may still open but are asked to close by 8:00 p.m. Most people wear masks at work or outdoors and seniors try to stay home. As a result, the scale of lockdown is much smaller than in North America and Europe, so is the damage to the economy.

Some local habits in Japan might help to explain this approach. Even prior to the COVID-19 outbreak, many people wore masks to avoid allergies or pollution and traditional greetings did not include physical contact such as shaking hands, hugging or kissing. You may have seen photos of Prime Minister Abe and other officials wearing masks at meetings in recent weeks. Tokyo’s morning rushhour scene is less crowded now, with about 30 to 50% of normal traffic on the trains into downtown. Nonetheless, passengers are still quite close to each other, almost all wearing masks.

Japan has applied a cluster-based approach to fight the outbreak, focusing on finding the super spreaders and isolating them, instead of widespread testing. The government is considering the adoption of a smartphone app in May that would allow authorities to quickly identify people who may have been exposed to individuals infected with COVID-19. This app will be similar to the one developed and introduced in Singapore. If users of the app come in close contact, the handsets will receive each other’s phone number and record it in an encrypted form. When an app user is tested and identified as infected with COVID-19, the app sends notifications to people who have been nearby. The name of the infected person and exact time of the encounter will not be disclosed. The app’s data will be deleted after a certain period of time and agreement is required from all users to protect their privacy.

Stimulus Package

The negative impact of the pandemic is already reflected in the macro data. Japan’s machine tool orders in March 2020 was 77.45 billion yen, a decline of 41% year over year. The unemployment rate increased to 2.5% in March, from 2.4% the month earlier. The picture is more complex in the sense that labor shortage is still an issue. The ratio of job offers to job seekers remains high at 1.39, meaning that there are 139 job openings for every 100 people looking for a job.

The Japanese government announced its largest-ever stimulus package of 117 trillion yen, equivalent to 20% of its GDP, of which, direct fiscal spending totals 48.4 trillion yen. The package also includes loan programs, deferred tax payments and subsidies, among other items. For example, 100,000 yen in cash per person will be handed out regardless of income level. The Bank of Japan promised to buy as many government bonds as needed and more than double its buying of corporate debt.

Cash is King

Generally, Japanese individuals have high savings. Financial assets held by households in Japan increased by 3.3% in 2019 to 1,903 trillion yen, which is equivalent to about 15 million yen per capita. Cash and deposits accounted for 53% of these assets.

Listed Japanese corporations held a total of over 500 trillion yen in cash, more than the respective GDP of most countries. Over 50% of non-financial companies listed on the TOPIX are sitting on net cash balances. Share buybacks have been increasing for several years, reaching a record high of 8 trillion yen in 2019, supported by their own cash flows instead of debt.

Japan is the world’s largest creditor country for the 28th straight year. At the end of 2018, the net value of assets held by the Japanese government, corporations and individuals was 342 trillion yen.

Equity Market Support

Japan’s Government Pension Investment Fund (GPIF) is the world’s biggest pension fund with total assets of about 169 trillion yen. Allocation targets to Japanese stocks, foreign stocks, Japanese bonds and foreign bonds are currently set at 25% each.

The Bank of Japan has been buying ETFs of a few Japanese indices at an annual rate of 6 trillion yen. This year, the Bank of Japan decided to double the purchase to 12 trillion to ease the crisis.

Japan’s Outlook

No country can completely escape this crisis but relatively speaking, we feel that Japan stands a better chance for a sustainable recovery. Its pandemic control seems to be more effective than many Western countries, and Japan will continue to support a partial lockdown that is less damaging to the economy. The largest-ever stimulus package should help sustain the low unemployment rate. Most Japanese individuals and corporations should be able to weather the crisis thanks to their solid balance sheet. The Japanese stock market is also supported by the GPIF and Bank of Japan through the purchase of stocks and ETFs.

We invest in about 20 high quality companies in Japan across nine sectors. While a few stocks in the consumer discretionary and industrials sectors got hit hard by the COVID-19 crisis, others in communication services, healthcare and consumer staples outperformed. We feel very confident about their long-term growth potential.

In the coming weeks, we will attend many virtual investment conferences; these conferences are a very good way to maintain communication with our holdings and discover new ideas. Please stay tuned for updates in future commentaries.

Have a nice week ahead.

The Global Alpha Team


Fund 6.2% -17.7% -16.3% -13.1% -12.5% -5.0%
Index 7.7% -14.3% -13.4% -9.8% -9.4% -5.8%

1 All returns and fund details are a) based on Series F units; b) net of fees; c) annualized if period is greater than one year; d) as at April 30, 2020; e) since inception (March 15, 2018). The index is 100% MSCI EAFE Small Cap NR USD (CAD) and is computed by Ninepoint Partners LP based on publicly available index information.

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