Report type: Weekly Strategy

Nikkei Average VI at “major bottom” – beware of soaring volatility

The Nikkei Average is showing signs of a stalemate ahead of the announcement of the appointment of a new deputy governor of the BOJ, which is reported to be submitted to the Diet on 14/2.  The Nikkei Stock Average Volatility Index (Nikkei VI), which reflects investor sentiment toward Japanese stocks and is also known as the Japanese version of the fear index, fell to 15.92 at the close of trading on 8/2, the lowest level since 6 July, 2021.

When it was reported in the early morning of 6/2 that the government had approached Deputy Governor Amamiya about succeeding BOJ Governor Kuroda, the market reacted with a weaker yen and a stronger dollar, a decline in long-term interest rates, and higher stock prices due to expectations and conviction that the BOJ would maintain its course of large-scale monetary easing.  In response, the PMO denied the report, and PM Kishida himself stated that he would place importance on the ability to disseminate information both domestically and internationally.   As a result, the name of former BOJ Deputy Governor Nakaso, a leading figure in the “global camp”, is surfacing rapidly in financial markets.  If Deputy Governor Amamiya were eliminated from consideration, it is likely that the yen will appreciate against the US dollar and the Nikkei Average will fall.

Looking at overseas markets, European equities are performing well along with expectations of a recovery in the Chinese economy.  The risk of recession in the European economy is receding as inflation growth is slowing as a result of easing energy shortages owing to falling natural gas prices.  The UK FTSE 100 index hit record highs during trading hours for consecutive days through 9/2, and the German DAX index reached its highest level in a year on 9/2.  Against this backdrop, it is worrisome that there is growing concern that Russia may launch a large-scale offensive in late February, one year after its invasion of Ukraine.

Given this outlook for domestic and overseas conditions, it is important to note that from mid- to late February the volatility of Japanese stock prices may expand from a “major bottom”.  It should be noted that, against the backdrop of the declaration of a state of emergency due to the COVID-19 pandemic, the Nikkei Average had fallen from 28,600 points on 6 July, 2021 to below 27,000 points on 20 August, 2021 before reversing and rising due to rising expectations towards the “post-PM Suga” era.

Market volatility due to a BOJ governor appointment surprise will be a tailwind for banking and insurance stocks owing to the expectation of large-scale monetary easing corrections.  In addition to investing in individual financial stocks for dividends, the NEXT FUNDS TOPIX Banks ETF (1615) will also be of interest.  The financial sector is also likely to benefit from higher US long-term interest rates following the release of the December US jobs report, and the scope for benefits both domestically and internationally is expected to be relatively broad.  In addition, regarding risks of the situation in Ukraine, focus will likely be on trading company stocks and other stocks that are likely to benefit from a sharp rise in commodity prices due to the tight supply-demand conditions for commodities such as energy, grains, and precious metals produced in Russia.

In the 13/2 issue, we will be covering Panasonic Holdings (6752), Nintendo (7974), Nippon Building Fund Management (8951), and TV Tokyo Holdings (9413).

Panasonic Holdings Corp (6752)　　　　　　　　　　1154 yen (10/2 closing price)

・General electronics manufacturer established in 1935.  Produces, sells, and provides services for home appliances, FA equipment, information and telecommunications equipment, and housing equipment.  Besides lithium-ion batteries and devices, focus is also on the expanding automotive business.

・For 9M (Apr-Dec) results of FY2023/3 announced on 2/2, net sales increased by 14.8% to 6.2245 trillion yen compared to the same period the previous year, and operating income decreased by 14.6% to 234.22 billion yen.  3Q (Oct-Dec) sales increased 14% YoY and operating income increased 16% YoY.  3Q sales by segment were up 27% YoY in Automotive business, and up 26% YoY in Energy business, which includes the automotive battery business for Tesla.

・Company has revised its full year plan downwards.  Net sales is expected to remain unchanged, increasing by 11.0% to 8.2 trillion yen compared to the previous year, and operating income to decrease by 21.7% to 280.0 billion yen (original plan 320.0 billion yen) as a result of deteriorating market conditions in China (ICT etc).  Tax credits under the US Inflation Control Act, which was passed in August last year and enacted from the end of December, cannot be factored into the earnings forecast because the detailed forecast for the Nevada plant for Tesla, which is currently in operation, and the new plant in Kansas, which is scheduled to start operations in fiscal 2024, has not been announced.

Nintendo Co., Ltd (7974)　　　　　　　　　　　　　　5307 yen (10/2 closing price)

・Founded in 1889 as a manufacturer of “Hanafuta” (Japanese playing cards).  Started manufacturing and selling “Karuta” (Japanese traditional playing cards) and western playing cards in 1947.  Principal product is a “game console” using a computer.  Has a 32% stake in The Pokemon Company, an equity-method affiliate.

・For 9M (Apr-Dec) results of FY2023/3 announced on 7/2, net sales decreased by 1.9% to 1.2951 trillion yen compared to the same period the previous year, and operating income decreased by 13.1% to 410.5 billion yen.  In 3Q (Oct-Dec), when year-end sales is concentrated, sales declined 8.3% YoY and operating income fell 24.7% YoY.  “Switch” hardware consoles reached a cumulative total of 125.55 million units sold, with sales volumes slowing.

・Company has revised its full year plan downwards.  Net sales is expected to decrease by 5.6% to 1.6   trillion yen (original plan 1.65 trillion yen) compared to the previous year, and operating income to decrease by 19.0% to 480.0 billion yen (original plan 500.0 billion yen).  Annual dividend to reduce by 44 yen to 159 yen.  An increase in software unit sales is expected even with the decline in hardware console sales volume.  “Super Nintendo World” will open at Universal Studios Hollywood on 17/2 while “The Super Mario Bros. Movie” will open worldwide in April.  New frontiers are being explored.