1. SuMi TRUST has updated its operating profit forecast for the Nikkei 225 (see Figure 1) for the current fiscal year ending March 2020 (FY2019) and the next fiscal year ending March 2021 (FY2020).

・FY 2019: We forecast lower earnings from falling demand in the material sectors (Iron & Steel, Non-ferrous Metals) and Auto & Transport Equipment, a slowdown in the external demand-related and technology sectors including Electric Appliances, and slightly lower earnings in the Energy Resources. Conversely, we see the domestic demand- related sectors such as Retail and Services holding up despite a slight slowdown. However, the domestic demand- related sectors overall will be dragged down by companies impacted by their overseas investments.

・FY 2020: With a gradual recovery in demand, we see higher earnings in the external demand-related sectors including the material sectors (Iron & Steel, Non-ferrous Metals), Energy Resources and Auto & Transport Equipment. We also see increased earnings amongst domestic demand-related companies that include Retail, which is cutting its costs, higher consumption of Services due to longer leisure time, and improving earnings in the Pharmaceuticals which is seeing the effects of acquisitions.

monthcom aug19 1.PNG

Comments on the earnings forecast of major sectors for FY2019 and FY2020 are shown in Figure 2.

monthcom aug19 2.PNG
monthcom aug19 3.PNG

2. SuMi TRUST has also updated the view on impact of US-China trade frictions on Japanese companies

Intensifying trade frictions have resulted in an increased the number of bankruptcies, higher unemployment and sluggish consumption in China. It has also impacted some Japanese companies there as well. Additional risks include falling investments into China, changes in the supply chain, and additional tariffs by the US. On the other hand, this increases business opportunities and should improve Sino-Japanese relations. Furthermore, we can expect monetary relaxation measures and stimulus policies to underpin the economy, and thus do not see much more downside for Japanese companies.

For Japanese companies, the slowdown in external demand and sluggishness in personal consumption from higher consumption taxes will become a burden. But economic stimulus measures to counter higher taxes, and rising wages stemming from the tight labour market, should keep the Japanese economy on a path of gradual expansion. Whilst we expect lower earnings for FY 2019, FY 2020 should see higher earnings.

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