Nomura_Outlook for Japanese equities heading into 2019_watermark

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Fig. 11: iTraxx Europe Senior Financials CDS index (5 years, senior debt, daily)

No sign of increased credit risk yet

(bp)
350
300
250
200
150
100
50
0
2012	2013	2014	2015	2016	2017	2018 (CY)

Note: Latest data as of 2 November 2018.

Source: Nomura, based on Bloomberg data

(5) Key points in equity supply-demand: individual investors and the BOJ

(1) Individual investors: aging population results in increased selling pressure

We see a strong likelihood of a structural increase in selling pressure from individual investors in 2019. Japanese individual investors are generally regarded as contrarians and as structural sellers. Such investors are net sellers by around ¥1.3trn per annum even when excluding equity finance impact. In our 17 October 2018 Global Research report Why do individual investors sell Japanese equities?, we argued that the Japanese equity supply-demand climate is affected by Japan's increasingly aging population and government policies designed to encourage asset formation.

Does the government have the appetite to do anything about the structural selling of Japanese equities by individual investors?

The FSA and the JSDA submitted their tax reform requests for FY18 in Aug-Sep. Making Nippon Individual Savings Accounts (NISAs) permanent and more convenient is likely to be relatively high on the list of items for discussion. However, making changes to the inheritance tax treatment of listed equities is likely to be tougher, as the accusation would be that this favors the wealthy. Nevertheless it will be worth monitoring how the discussions play out as a means of gauging whether the government has the appetite to do anything about the structural selling of Japanese equities by individual investors.

(2) BOJ: stealth tapering furor somehow amounted to nothing

In the September edition of our Japan equities investment strategy report, we mentioned the possibility of the BOJ reducing its ETF purchases in our BOJ ETF purchasing program update. However, thereafter the pace of purchases recovered and got back on track (Figure 12). In recent market operations, there has been a tolerance of around ¥500bn versus the purchase amount over the previous year.

For J-REITs stealth tapering does seem to be under way though

More interesting is that the pace of the BOJ's REIT purchases is undershooting the expected level. Although there were almost no questions on this subject at the press conference, REIT purchases look set to come in at around ¥70bn versus the BOJ's annual ¥90bn earmarked for REITs (Figure 13). One interpretation might be that the BOJ seems to be experimenting with J-REITs before it starts to rein in its ETF purchases.

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Fig. 12: BOJ ETF purchases (cumulative in 2018)

Back on track

(¥trn) 24

23

22

21

20

19

18

17

16

2017/12/31 2018/12/31 (yy/mm/dd)

Note: Most recent data as of 2 November 2018.

Source: Nomura, based on BOJ data

Fig. 13: BOJ J-REIT purchases (cumulative in 2018)

Clearly undershooting

(¥bn

520

480

440
2017/12/31		2018/12/31
		(yyyy/m/d)
Note: Most recent data as of 2 November 2018.
Source: Nomura, based on BOJ data

(6) Corporate governance reforms: look back at 2018 thus far and focus points for 2019

Lastly, we take a look at corporate governance reforms thus far in 2018 and points to focus on in 2019.

2018 thus far

The main events related to corporate governance in 2018 include: (1) publication of guidelines for dialog between investors and companies, revisions to the Corporate Governance Code, and revisions to Corporate Governance System (CGS) Guidelines;

(2) release of the ESG Report and investment in global environmental stock indices by the Government Pension Investment Fund; and (3) launch of collective engagement by 10 life insurers (Figure 14).

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Fig. 14: Chronology of corporate governance events

Events in 2018 are: (1) corporate governance related; (2) ESG investment; and (3) collective engagement.

	Date
		Reform		Remarks
	(yyyy/m)
			Revamps corporate governance
	2013/6	Japan Revitalization Strategy published	-Amends Companies Act and encourages the appointment of outside directors
			-Considers and puts together Japanese Stew ardship Code
	2014/1	JPX-Nikkei Index 400 created	Consists of shares in companies that meet certain conditions (eg, capital efficiency and investor-friendliness)
	2014/2	Stew ardship Code enacted	Based on seven principles, it calls on institutional investors to engage in a dialogue w ith the companies they invest in aimed at
			increasing the companies' enterprise value
			(1)	Enables the establishment of companies w ith an audit and supervisory committee
	2014/6	New Companies Act enacted	(2)	Revises rules governing outside directors
			Stricter requirements for outside directors
			Requires companies to justify claims that it w ould be inappropriate for them to appoint an outside director
	2014/6	Japan Revitalization Strategy 2014	Mentions need to attain international level of ROE; expects companies to make active use of retained earnings (eg, for capex,
			restructuring, and M&A)
	2014/8	METI published Ito Review	Recommends that companies aim for an ROE of at least 8%
			(1)	Requires companies that fail to observe Corporate Governance Code's principles to explain the reason w hy and
	2015/2	TSE announced listing rule revisions	companies that do observe the principles to explain and disclose the principles concerned
			(2)	Requires listed companies that appoint independent board members to disclose and summarize any material connections
			betw een the board member and the company
	2015/5	New Companies Act came into effect
			(1)	Requires companies to disclose the principles governing their strategic shareholdings
			(2)	Requires companies to make full disclosure of matters such as their business strategies and the principles governing their
	2015/6	Corporate Governance Code enacted	appointment of directors
			(3)	Requires companies to appoint at least tw o independent directors; requires companies that are likely to be deemed big
			enough for at least one-third of their directors to be independent directors to disclose w hat action they propose to take
			(1)	Produces and publishes guidelines, including a set of examples, for interpreting the Companies Act
			(2)	Enables companies to adopt a flexible approach to incentivizing senior managers to create longer-term enterprise value
	2015/6	Japan Revitalization Strategy 2015	(eg, by offering them stocks instead of cash or relating their pay to company performance)
			(3)	Seeks to make it easier for companies to recruit suitable independent directors by collecting and disseminating specific
			examples from Japan and other countries
			(1)	Enables companies to include compensation in the form of stock w ith special transfer restrictions to be treated as pre-
	2015/12	FY16 tax revision proposals	declared bonus payments and offset against losses
			(2)	Adds and clarifies criteria (eg, ROE) to be used in the case of performance-related compensation
	2016/6	Japan Revitalization Strategy 2016	Sets out timetable for companies to disclose information more efficiently
			(1)	Extends deadline for companies to submit their tax returns to six months after the end of their business year
			(2)	Extends types of board member compensation that may be offset against losses (to include, for example, compensation
	2016/12	FY17 tax revision proposals	related to share price performance)
			(3)	Makes provision for the taxation of corporate reorganizations (eg, the deferral of taxes on capital gains/losses resulting
			from spinoffs)
	2017/3	Stew ardship Code revised	Requires fuller disclosure of how institutional investors have exercised their voting rights
	2017/6	Investments for the Future Strategy	Included KPI of raising large (TOPIX 500) companies' ROA to a level on par w ith US and European companies, by 2025
		2017
	2017/9	GPIF started to invest in ESG indices	Announced 3 indices to invest. 2 are general types, w hile 1 is thematic (promoting active engagement of w omen).
		Follow -up council for stew ardship,	The Secretariat listed observations regarding five points related to corporate governance reform: (1) Investments and retained
	2017/10		earnings, (2) Management decisions in response to changes in the business environment, (3) CEOs/executive boards, (4)
		corporate governance code restarted
			Cross-shareholdings, (5) Asset ow ners
	2017/10	Ito Review 2.0 released	Included 8 proposals such as the draw ing up of collaborative value creation guidance as a shared language betw een
			companies and investors. Text stating minimum level for ROE of 8% disappeared
	2017/11	PFA and 4 institutional investors started	Efforts to engage in deeper dialogue w ith companies to be stepped up
		collective engagements
	2018/3	10 lifers started collective engagements	Sent letters to about 100 companies requesting for improvements
	2018/6	Corporate Governance Code revised	Requested corporates to explain more on cross holdings and capital cost
	2018/6	The Guidelines for Investor and	Annex of Stew ardship Code and Corporate Governance Code
		Company Engagement announced
	2018/8	GPIF issued ESG activity report	Measured ESG investment impacts
	2018/9	GPIF invested in Global Environmental	Announced 2 indices (Japan and non-Japan) to invest. Total ESG investments estimated at JPY2.7trn
		indices
	2018/9	Revisions to Corporate Governance	Revisions to guidelines concerning executives and boards of directors
		System (CGS) Guidelines

Source: Nomura, based on various sources

(1) Corporate governance related: from form to substance

On 1 June, the Financial Services Agency announced guidelines for dialog between investors and companies. In response, on 1 June, the Tokyo Stock Exchange revised the Corporate Governance Code and its securities listing regulations as they pertain to the code.

The main themes of the dialog guidelines and revisions to the Corporate Governance Code are: (1) whether or not the selection/dismissal of CEOs, succession plans, and selection/dismissal of directors (including outside directors) are being conducted in line

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with the target of contributing to longer term improvement in corporate value; and (2) how to calculate cost of capital and how to achieve profit margins that exceed that (including the topic of what to do with long-term shareholdings in the allocation of assets from the perspective of cost of capital).

The Ministry of Economy, Trade and Industry revised the Corporate Governance System Guidelines on 28 September. The main revisions relate to executives and the board of directors: (1) the appointment of president and CEO and succession plans; (2) the chair of the board of directors; (3) the use of the nominating and compensation committees;

(4) the use of outside directors; and (5) advisory positions. These are all important items in making corporate governance reform meaningful.

(2)ESG investment: ESG Report and launch of global environmental investment

GPIF started passive investment in ESG in 2017 and released a report on the first year of this investment on 13 August. GPIF says evaluation of ESG investment requires a different perspective than investment returns over a certain period as: (1) a long time is need to realize the benefits of ESG investment; and (2) it also aims to improve the sustainability and boost financial markets in general. On 25 September, GPIF selected global environmental stock indices and started passive investments based on the indices.

(3)Collective engagement: life insurers come to life

On 5 March, 10 life insurance companies in Japan said they plan to begin collective engagement. In November 2017, the Pension Fund Association and four institutional investors started collective engagement, indicating advances are being made to further dialog between companies and investors.

Corporate governance reforms plans in Investments for the Future Strategy 2018

The Investments for the Future Strategy 2018 references to corporate governance reforms are: (1) to draw up practical guidelines on group governance by spring 2019; (2) reaching a conclusion in FY18 on providing new rules for mergers using stock as compensation; (3) implementing measures based on the conclusions of the Financial System Council by mid-2019 with regard to information disclosures by listed companies;

(4) reaching a conclusion in FY18 on electronic provision, in principle, of documents appended to notices of general meetings of shareholders; (5) publishing in 2018 examples and related issues under consideration for unifying the disclosures made in business reports with those made in securities filings; (6) issuing in FY18 guidance and commentary to complement and supplement the Environmental Reporting Guidelines;

(7) selecting companies in FY18 in response to the recommendations of the Task Force on Climate-related Financial Disclosure and providing advice and support; and (8) carrying out in FY18 efforts to show the market what an environmentally sustainable company looks like and to deploy in full a platform for promoting issuance of green bonds.

Points to watch in 2019

Points to watch in 2019 include: (1) deliberations over revisions to the Companies Act;

(2) policies at proxy voting advisory companies; and (3) exercise of voting rights by individual asset management institutions.

(1) Deliberations on bill to revise Companies Act: review of discipline

The Legislative Council of the Ministry of Justice has been discussing revisions to corporate law (particularly with regard to corporate governance) ahead of expected deliberations at the 2019 regular Diet session. Issues of relevance to equity investment include the review of discipline related to general shareholder meetings and the review of discipline related to boards of directors. Proposals for enhancing shareholder meeting discipline include a system for providing shareholder meeting materials electronically and restrictions on the number and content of shareholder proposals. Potential revisions to enhance discipline for boards of directors include mandatory appointment of outside directors at listed companies and improved disclosure of director compensation and of methods for determining that compensation.

(2) Policies at proxy vote advisory companies: ISS and Glass Lewis

Beginning in February 2019, Institutional Shareholder Services (ISS) plans to recommend voting against top executive appointments at any company whose board

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consists of less than one-third outside directors after the shareholder meeting. It has also announced that it is considering adding cross-shareholding relationships to its standards for determining the independence of outside directors in its voting policies for 2019. It closed its call for comments on 1 November, and we now await its final decision.

Glass Lewis has announced that it will recommend opposing any president or chair appointments at TOPIX 100 constituent companies that have not appointed female officers (directors or auditors), beginning with general shareholder meetings in February 2019.

(3) Exercise of voting rights by asset management institutions

Since 2017, major asset management institutions now disclose their record of voting at general shareholder meetings in order to improve the transparency of their stewardship activity and fulfill their accountability to the owners of the assets they manage. We expect such disclosure to become more widespread in 2019 and thereafter. While there has been little news on this front recently, we will be watching what becomes of "collective engagement" from here.

Will takeover defense measures still be allowed?

Among proposals at general shareholder meetings receiving high numbers of opposing votes, we note that proposals to establish or maintain takeover defense measures were already subject to strong opposition. A growing number of companies have been removing their takeover protections in recent years, and we expect any new proposals to establish of maintain such defense measures to be fiercely opposed by investors (Figure 15).

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Fig. 15: Companies with takeover defense measures up for renewal in 2019

Will measures be removed ahead of general shareholder meetings, or will these mark the first takeover defense measures to be voted down by shareholders?

	Code	Company	Introduction	Validity
			Date	period
	1824	Maeda	2016/5/12	3 years
	2264	Morinaga Milk Industry	2016/4/26	3 years
	2531	Takara Holdings	2016/5/9	3 years
	2801	Kikkoman	2016/4/27	3 years
	2810	House Foods Group	2016/5/12	3 years
	3941	Rengo	2016/3/29	3 years
	4044	Central Glass	2016/5/20	3 years
	4045	Toagosei	2016/2/4	3 years
	4095	Nihon Parkerizing	2016/5/16	3 years
	4114	Nippon Shokubai	2016/5/10	3 years
	4118	Kaneka	2016/5/12	3 years
	4206	Aica Kogyo	2016/4/27	3 years
	4401	ADEKA	2016/5/19	3 years
	4403	NOF	2016/5/10	3 years
	4534	Mochida Pharmaceutical	2016/5/13	3 years
	4613	Kansai Paint	2017/5/12	2 years
	4681	Resorttrust	2016/5/13	3 years
	4921	Fancl	2016/5/17	3 years
	5332	TOTO	2016/5/20	3 years
	5401	Nippon Steel & Sumitomo Metal	2016/4/28	3 years
	5411	JFE Holdings	2017/4/27	2 years
	5463	Maruichi Steel Tube	2016/5/11	3 years
	5703	Nippon Light Metal Holdings	2016/5/13	3 years
	5711	Mitsubishi Materials	2016/5/12	3 years
	5713	Sumitomo Metal Mining	2016/2/16	3 years
	6457	Glory	2016/5/12	3 years
	6849	Nihon Kohden	2016/5/10	3 years
	6923	Stanley Electric	2016/5/16	3 years
	7747	Asahi Intecc	2016/8/10	3 years
	7762	Citizen Watch	2016/5/26	3 years
	7911	Toppan Printing	2016/5/26	3 years
	7912	Dai Nippon Printing	2016/5/12	3 years
	8012	Nagase	2016/5/23	3 years
	8616	Tokai Tokyo Financial Holdings	2016/5/23	3 years
	8802	Mitsubishi Estate	2016/5/19	3 years
	8830	Sumitomo Realty & Development	2016/5/12	3 years
	9008	Keio	2016/5/27	3 years
	9009	Keisei Electric Railway	2016/5/20	3 years
	9044	Nankai Electric Railway	2016/3/30	3 years
	9404	Nippon Television Holdings	2016/5/13	3 years
	9843	Nitori Holdings	2016/4/12	3 years

Note: TOPIX 500 constituent companies with proposals to renew of takeover defense measures scheduled in 2019.

Source: Nomura, based on company disclosure materials

Some moves to oppose changes in officer compensation, appropriation of surplus funds

We also see a growing trend of shareholders opposing changes in officer compensation, particularly at companies with slumping earnings. With the increasing opposition to the distribution of retained earnings as well, we will be watching whether discussions of corporations' capital costs will move forward as part of the judgment criteria for whether such moves will contribute to longer-term growth.

(7) Five new inclusions in our Nomura strategists' equities portfolio

In view of the investment conditions described above, we add five stocks to this month’s

Nomura strategists’ equities portfolio—Bic Camera, THK, T&D Holdings, Toho, and

Secom. These selections center on stocks which we expect to show earnings

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improvement into FY19. We also note that, while we indicated a policy of avoiding small caps in the September edition of our Japanese equities investment strategy report, we remain cognizant that small cap underperformance has likely only just begun (Figure 16).

Fig. 16: Relative performance of small caps (Russell/Nomura Small Cap)

Small cap underperformance has likely only just begun

(end-2010=100)
140
	Russell/Nomura Small / Russell/Nomura Large
130
120
110
100
90								(y/m)
11/1	12/1	13/1	14/1	15/1	16/1	17/1	18/1

Note: Shows daily relative share price performance, rebased so that end-2010 = 100. Performance includes dividends.

Most recent data is for 2 November 2018.

Source: Nomura

Investment themes for 2019

We believe there are some key factors to keep in mind when coming up with investment themes for 2019. With Japan facing population decline and labor shortages, we believe there will be an ongoing focus on growing the overall demand pie via efforts to win inbound demand, boosting productivity via the use of robotic process automation (RPA), and the acceptance of foreign nationals to fortify the labor force. Also, with recent conditions making sustained profit growth more of a challenge, we will be focusing on management efforts and decision-making at companies aiming to further improve their earnings.

Tokyo Olympic-related stocks likely to see concrete earnings benefits

The opening of the 2020 Tokyo Olympics is fast approaching. We have put together a "Golden Six" selection of mainly large-cap stocks and a "Silver 65" selection of mainly small/mid-cap stocks likely to see concrete earnings benefits from Japan’s hosting of this event.

Investment theme: prospects for an Osaka/Kansai-hosted World Expo and related stocks

The 2020 Tokyo Olympics are approaching, but prior to that, the decision on hosting rights for the World Expo 2025 is slated for 23 November. In this month’s investment theme section, we look at prospects for an Osaka/Kansai-hosted World Expo and related stocks.

(Hisao Matsuura, Masaki Motomura)

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2. Nomura strategists’ equities portfolio

Fig. 17: Nomura strategists' equities portfolio

		Rating	FY	Share price	P/E	Rec profit growth		ROE	P/B	DPS	Dividend	β
		(11/5)		(11/5)		This FY	Next FY				yield
				¥	x	%	%	%	x	¥	%
1605	Inpex	Buy	19/3	1,269.0	37.9	21.3	46.6	1.7	0.64	24.00	1.89	1.26
1721	Comsys Holdings	Buy	19/3	3,005.0	14.8	9.1	6.0	9.8	1.50	62.00	2.06	0.83
1801	Taisei	Buy	19/3	5,120.0	10.2	-12.3	8.6	16.1	1.72	135.00	2.64	0.51
1802	Obayashi	Buy	19/3	1,047.0	7.4	2.8	1.4	13.9	1.10	31.00	2.96	0.54
5233	Taiheiyo Cement	Neutral	19/3	3,260.0	9.7	2.1	7.0	10.1	1.02	80.00	2.45	1.34
3861	Oji Holdings	Buy	19/3	718.0	11.8	65.4	6.3	8.6	1.05	14.00	1.95	1.16
4063	Shin-Etsu Chemical	Buy	19/3	9,856.0	13.3	27.6	1.5	12.8	1.79	220.00	2.23	1.15
5108	Bridgestone	Buy	18/12	4,296.0	10.1	4.2	11.7	12.7	1.38	170.00	3.96	0.79
6146	Disco	Buy	19/3	18,150.0	19.8	-14.2	22.8	15.2	3.19	229.00	1.26	1.16
6301	Komatsu	Buy	19/3	3,134.0	11.5	32.6	15.2	14.8	1.78	109.00	3.48	1.22
6383	Daifuku	Buy	19/3	5,180.0	18.2	24.1	9.8	17.8	3.47	80.00	1.54	1.16
6481	THK	Neutral	18/12	2,653.0	8.3	82.4	0.0	13.2	1.24	96.00	3.62	1.32
6594	Nidec	Buy	19/3	14,305.0	25.9	24.0	17.7	16.3	4.54	110.00	0.77	1.12
6762	TDK	Buy	19/3	10,210.0	14.9	33.6	24.2	10.1	1.56	160.00	1.57	1.56
7701	Shimadzu	Buy	19/3	2,842.0	25.2	10.3	7.6	11.9	3.13	26.00	0.91	1.01
2146	UT Group	Buy	19/3	3,280.0	23.9	56.4	30.7	49.6	14.88	0.00	0.00	0.80
2413	M3	Buy	19/3	1,899.0	57.4	18.6	26.1	23.5	14.96	0.00	0.00	0.28
4307	Nomura Research Institute	Buy	19/3	5,110.0	22.1	8.8	8.3	12.9	2.90	90.00	1.76	0.75
4324	Dentsu	Neutral	19/2	5,270.0	17.3	-29.6	24.8	7.4	1.36	90.00	1.71	0.85
4689	Yahoo Japan	Buy	19/3	328.0	16.7	-19.8	4.2	11.4	1.84	8.86	2.70	1.13
7974	Nintendo	Buy	19/3	34,990.0	20.3	48.3	37.1	15.1	3.19	860.00	2.46	1.20
9602	Toho	Buy	18/12	3,595.0	21.3	-8.9	2.9	8.7	1.91	35.00	0.97	0.77
9603	HIS	Buy	19/10	3,475.0	13.7	19.2	27.4	15.0	2.37	38.00	1.09	0.44
9699	Nishio Rent All	Buy	19/9	3,635.0	9.6	22.1	3.6	12.6	1.26	81.00	2.23	1.00
9735	SECOM	Buy	19/3	8,932.0	22.9	-2.1	12.4	8.7	2.05	165.00	1.85	0.73
9062	Nippon Express	Buy	19/3	7,140.0	14.4	4.4	9.4	8.6	1.29	145.00	2.03	0.82
9064	Yamato Holdings	Buy	19/3	2,902.0	26.9	96.2	25.0	7.5	2.08	28.00	0.96	0.50
9101	Nippon Yusen	Neutral	19/3	1,887.0	41.9	-40.4	191.0	1.4	0.58	20.00	1.06	1.32
3360	Ship Healthcare Holdings	Buy	19/3	4,085.0	17.1	4.8	12.1	11.5	2.07	71.00	1.74	0.23
3048	Bic Camera	Buy	19/8	1,511.0	14.1	13.2	-7.3	13.7	2.07	20.00	1.32	0.66
8306	Mitsubishi UFJ Financial Group	Buy	19/3	673.7	9.3	-7.5	11.2	5.8	0.55	20.00	2.97	1.76
8411	Mizuho Financial Group	Buy	19/3	194.1	8.5	7.8	-4.2	6.2	0.54	7.50	3.86	1.28
8750	Dai-Ichi Life Holdings	Buy	19/3	2,187.5	11.7	-10.3	4.1	5.7	0.68	53.00	2.42	1.80
8795	T&D Holdings	Buy	19/3	1,864.0	14.3	2.8	5.3	6.9	1.01	41.00	2.20	1.73
8806	Daibiru	Buy	19/3	1,104.0	19.8	-10.7	5.3	4.1	0.83	19.00	1.72	1.10
	Average				18.3	13.9	17.6	12.0	2.50		1.95	1.01

Note: (1) P/E ratios, ROE, and dividend yield data are based on estimates for next FY in case of companies with less than three months before their FY-end and on estimates for current FY for companies with three months or longer before their FY-end. (2) P/B ratios are based on previous FY-end actual BPS and number of shares excluding treasury stock. (3) Beta values are 60-month beta values calculated versus the TOPIX. (4) Data are based on US GAAP or IFRS when available and on Japanese accounting standards otherwise and are on consolidated basis when available and on parent basis otherwise. Recurring profit data for US GAAPand IFRS-reporting companies is pretax profits.

(5) Companies are listed in order of TOPIX-17 Series sector classification. (6) Share prices, ratings and earnings estimates as of 5 November. Source: Nomura

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Fig. 18: Newly included stocks

3048 Bic Camera

6481 THK

Guidance for 19/8, especially for Kojima [7513], looks cautious. Kojima sales got off to a good start in September by topping guidance. While we expect upfront spending on IT systems aimed at strengthening e-commerce at the parent, we see this as the company laying the groundwork for longer-term growth and reaffirm our Buy rating.

Orders fell sharply in Jul-Sep, especially Japanese and Chinese SPE-related orders, and we expect harsh conditions to continue in Oct-Dec. Following a fall in the share price the shares are trading on a P/B of around 1x estimated 19/12 BPS, the lowest level since 2010. We expect the share price to rebound on signs of a recovery in orders.

8795 T&D Holdings

9602 Toho

9735 SECOM

The net asset value of insurers would improve on higher ultra-long interest rates in Japan. Other potential catalysts for the stock include rising equities, yen depreciation, and increased shareholder returns driven by a recovery in the economic solvency ratio.

Operating profits in 19/2 Q2 were the second highest on record for the quarter. There are a large number of promising titles coming in 19/2 H1, including It Comes (released 7 December), Masquerade Hote l (18 January), and The Seven Conferences (1 February), and in view of this we think there is still upside for earnings.

We expect operating profits to decline in 19/3 as the company invests in people and technology with an eye to sustainable growth, but we take a positive view of these proactive investments designed to ensure growth over the longer term. We think operating profits will return to a growth trajectory from 20/3 as forward investments bear fruit and the company benefits from the development of new services in collaboration with other industries.

Source: Nomura

Fig. 19: Deleted stocks

		Rating	Share price (¥)
		(11/5)	(5 November close)
2269	Meiji Holdings	Buy	7,500.0
3626	TIS	Buy	5,230.0
4704	Trend Micro	Buy	6,640.0
8252	Marui Group	Buy	2,378.0
9983	Fast Retailing	Buy	57,650.0

Source: Nomura

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vk.com/id446425943	9 November 2018
No ura | Japanese equities investment strategy (November 2018)

Fig. 20: Performance of last month's Nomura strategists' equities portfolio

Changes in the Nomura strategists' equities portfolio and key indices
(yy/m/d)	18/10/5	18/11/5	% change
Nomura strategists' portfolio	100.00	92.30	-7.7
Nikkei 225	23,784	21,899	-7.9
TOPIX	1,793	1,640	-8.5
Relative performance (%)	(%)
vs. Nikkei 225	+0.2
vs. TOPIX	+0.8

Cumulative performance (93/6–) (%)

Absolute performance	+203.3
Relative performance
vs. Nikkei 225	+140.7
vs. TOPIX	+156.6
Performance in FY18 (18/4–) (%)
Absolute performance	-3.4
Relative performance
vs. Nikkei 225	-5.0
vs. TOPIX	+1.0

Note: Cumulative absolute performance up to the last report was 211.0%. Cumulative relative performance up to the last report was 140.4% versus the Nikkei 225 and 155.8% versus the TOPIX.

Source: Nomura

Fig. 21: Monthly performance of Nomura strategists’ portfolio, Nikkei 225, and TOPIX

										2018		2017	12-month
	10	9	8	7	6	5	4	3	2	1	12	11	cumulative
Nomura strategists' portfolio (%)	-7.7	5.9	-2.0	0.1	-2.2	1.7	0.8	3.3	-7.0	-2.0	5.8	2.3	-0.9
No. of stocks added	4	4	4	5	4	3	4	3	2	3	11	5	52
No. of stocks deleted	4	4	4	5	4	3	4	3	2	3	11	5	52
Nikkei 225 (%)	-7.9	6.3	-0.6	2.1	-1.9	0.3	3.4	3.0	-7.2	-4.9	4.0	1.7	-1.8
TOPIX (%)	-8.5	6.2	-2.6	1.2	-3.5	0.1	2.7	1.8	-7.1	-3.5	4.2	1.2	-7.8
Performance relative to Nikkei 225 (%)	0.2	-0.4	-1.4	-2.0	-0.3	1.4	-2.6	0.3	0.3	2.9	1.9	0.5	0.8
Performance relative to TOPIX (%)	0.8	-0.3	0.6	-1.1	1.3	1.6	-1.9	1.4	0.1	1.5	1.7	1.1	6.8

Note: (1) Monthly figures are from table entitled “Performance of last month's Nomura strategists' equities portfolio” in the relevant edition of Japanese equities investment strategy. For example, the figure of 5.9 for the Sep 2018 Nomura strategists' equities portfolio is based on the figure of 5.9 in the Oct 2018 edition of Japanese equities investment strategy. (2) Past performance should not and cannot be viewed as an indicator of future performance. (3) Transaction costs are not included in performance figures.

Source: Nomura

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