MARKET OUTLOOK & INVESTMENT STRATEGY
Marketing Communication
September 2024

Value + Alpha Group

PM’s Monthly PerspectivesAuthor

Takuya KAMIISHI, CMA
Lead Portfolio Manager

MARKET DEVELOPMENTS
The MSCI Japan index declined due to the stronger yen, concerns about a US economic slowdown
at the beginning of the month, and the unwinding of momentum trades, despite a rise in global stock
markets due to heightened expectations of a US rate cut. In depth, the cause of the decline in theJapanese stock index is three-fold: 1) The yen became stronger after Kazuo Ueda, governor of theBank of Japan (BOJ), said that "real interest rates are at a very low level at present" and the interest
rate gap between Japan and the US narrowed; 2) Concerns about a US economic slowdown grew inresponse to weaker-than-expected US Institute of Supply Management (ISM) Manufacturing
Purchasing Managers' Index (PMI), the US unemployment rate that triggered the Sahm recession
rule, and the first US rate cut since 2020 in sight, and; 3) Momentum trades (short yen bonds, shortyen, long Japanese equity futures by commodity trading advisors (CTAs), and momentum buying ofcash equities), by which positions were built up because the market had been moving in one
direction, were unwound. After the plunge of Japanese stocks in early August, however, the market
rebounded in response to positive ISM Services PMI and jobless claims, a dovish comment from theBOJ vice president Shinichi Uchida, as well as solid corporate earnings, etc. Incidentally, the fall inthe stock market came amid a fall in several asset classes since 17 July, and on 5 August, thecircuit breaker was triggered not only in the cash equity and futures markets, but also in the bondmarkets. The high volatility in August could also have been caused by several other factors, such as:1) the presence of systematic trend-following funds had increased; 2) the implementation of thecircuit breaker prevented investors from placing "buy" orders for equity futures as they could notarbitrage between cash equities and futures; and; 3) the demand for selling futures by bearish
leveraged ETFs and investment trusts increased.
Market: Buy Japanese stocks when P/B is 1.45x or below, 12-month forward P/E is 16.1x orbelow, or corporate earnings fall sharply
Returns on equity investments are higher if you invest when valuations are cheaper. This may seem
obvious, but it is surprisingly difficult to invest according to this principle. This is because there issome kind of decline in stock prices before valuations become attractive, and the fear of this could
prevent you from acting. However, when considering when to invest in stocks, we believe that you
should start from this obvious fact.
If you plot TOPIX valuations such as P/B or P/E on the horizontal axis and TOPIX total returns(annualised) over the past 10 years on the vertical axis, there is an inverse correlation. In otherwords, the cheaper the valuations, the higher the returns over the following decade.
The 10-year annualised return of the TOPIX was 5% or more when (1) the P/B ratio was 1.45x orless, (2) the P/E ratio was 16.1x or less, or (3) the P/E ratio appeared high due to a sharp decline inearnings due to a financial crisis, etc. At the end of August 2024, the P/B ratio of the TOPIX was1.37x and the 12-month forward P/E ratio was 14.5x, and, thus, from the valuation point of view, webelieve now is a good time to buy Japanese stocks. Japanese stocks fell sharply in early August, but
the earnings of Japanese companies remained solid and, in line with the fundamentals, Japanesestocks recovered from the low of 5 August.
Just like a cold wave hitting your town, there are times when markets plunge, but when they do,please remember the opening words. It may help you decide when to buy Japanese stocks.

Page | 1

MARKET OUTLOOK & INVESTMENT STRATEGY
0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

T OPIX Ac t u al PBR vs 1 0 ye ar an n u alize d r e t u r n s

15%10%5%0%-5%

y = -0.098x + 0.1919
R² = 0.7067

-10%
0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

Source: Bloomberg, TOPIX PBR since October 1993, SMDAM as at 30 August 2024

10121416182022T OPIX Fo r war d 1 2 m o n t h PER vs 1 0 ye ar an n u alize d r e t u r n s

15%10%5%usual condition

0%

GFC (From Dec
2008 to May 2010)

y = -0.0179x + 0.3383
R² = 0.8028-5%1112131415161718192021

Source: Bloomberg, TOPIX PER since June 2005, SMDAM as at 30 August 2024
GFC: Global Financial Crisis

Policy: Major candidates for LDP’s presidential election on 27 September and their policies
The Liberal Democratic Party (LDP) has decided to hold a presidential election to choose a
successor to President Fumio Kishida, with the official announcement on 12 September and voting
on 27 September. The LDP is fundamentally a pro-business party, and no matter who wins, probusiness policies are expected to continue in principle. And it is also likely that a snap election for
the House of Representatives will be called after a new president is elected, and even then, the probusiness policies are expected to continue, as the LDP’s current approval rating is significantly
higher than that of other parties, and the ruling coalition, including the LDP, is expected to win amajority in the election. In addition, there is an anomaly in Japan that stock prices tend to rise
before a general election of the House of Representatives.
Among the candidates, 43-year-old Shinjiro Koizumi will become Japan's youngest prime minister if
he wins, and the stock market is expected to respond favourably to his structural reform agenda,
such as easing regulations on layoffs and fully deregulating the conditionally approved ride-hailingservices. Sanae Takaichi's policy ideas are quite similar to those of former Prime Minister Shinzo
Abe, and she is an expansionary fiscal and dovish monetary policy proponent. If she wins, she willalso become Japan's first female prime minister, which is also likely to be positive for the stockmarket. While Taro Kono advocates structural reform, he is somewhat hawkish on monetary policy
and a proponent of fiscal reconstruction, and, thus, his impact on the stock market is likely to beneutral. Lastly, Shigeru Ishiba places an importance on the regional economy and is in favor ofraising taxes on financial income, so he is likely to have a negative impact on the stock market.

Page | 2MARKET OUTLOOK & INVESTMENT STRATEGYThe policy stances of major candidates are as follows:
Policy stances of major LDP presidential election (○: positive for the stock market, △: neutral,and ×: negative)
KoizumiEconomic growth or ○social security
Economic growth

IshibaTakaichiKono

×Social security○
Economic growth○
Economic growthFiscal policy

△
N/A

×
Advocates fiscal
reconstruction○
Advocates
expansionary policy

×
Advocates fiscal
reconstruction

Monetary policy△
N/A×
Hawkish○Dovish×
HawkishRaising taxes on
financial income○
Against×For△
N/A○
Against

Reviewing layoff
regulations○For△
N\A△N/A○For

Invigorate theregional economy
Proliferate nuclear
shelters

Reinforce national
defence capabilities
Promotetechnologicaladvancements onrobots,
semiconductors, andmaterials

Policy focus

Fully approve ridehailing services
Abolish the annualincome threshold fortax deduction

Reform labour
marketRequire every citizen
to file a tax returnSource: SMDAM as at 6 September 2024.
Investment Strategy
We expect that the Japanese equity market to advance due to a change in the management policy byJapanese companies, driven by the Tokyo Stock Exchange’s call for enhancements in the P/B ratio.
Over the long term, policies that are more open to foreign capital, including an improvement incorporate governance, as well as policies to boost the immigration intake, are likely to support themarket. We identify external factors, such as the outbreak of financial crisis and global recession, asmajor risks. We feel that the risk of a US recession has increased. Taking these into consideration, wewill overweight low-P/B companies with large net-cash positions or a lot of unrealised gains on land.
__________________________
Risk Warning: Past performance is not a reliable indicator of future performance and may not
be repeated. An investment’s value and the income deriving from it may fall, as well as rise, due
to market fluctuations. Investors may not get back the amount originally invested.
Notes: Some statements contained in this material concerning goals, strategies, outlook or other nonhistorical matters may be forward-looking statements and are based on current indicators andexpectations. These forward-looking statements speak only as of the date on which they are made, andthe Company undertakes no obligation to update or revise any forward-looking statements. These
forward-looking statements are subject to risks and uncertainties that may cause actual results to differ
materially from those contained in the statements. The Company and/or its affiliates may or may nothave a position in any financial instrument mentioned and may or may not be actively trading in any
such securities. The information is correct to the best of our knowledge at the date of issue.
The organisations and/or financial instruments mentioned are for reference purposes only. The contentof this material should not be construed as a recommendation for their purchase or sale. Charts andgraphs are provided for illustrative purposes only.
Page | 3

Takuya KAMIISHI, CMA
Lead Portfolio Manager, Value + Alpha GroupMr KAMIISHI joined Daiwa SB Investments in 2009 and covered
US & European equities as a strategist from 2010 to 2013. He
moved to Hong Kong in 2013 as an analyst for the auto &industrials sector in Asia Pacific ex-Japan equity. In 2015, hereturned to Japan and covered the IT & services sector as aJapan equity analyst. In 2016, he became a portfolio manager inthe Value + Alpha group.
Mr KAMIISHI obtained a BA degree in Economics from KeioUniversity (2009) in Japan.

Contact Details
Business Development and Client Relations
For investors outside the EEA:
Richard HAXE: +44 (0)20 7507 6431
Alex BARRY: +44 (0)20 7507 6419
Chloé CHOQUIN: +44 (0)20 7507 6424
Email: uksales@smd-am.co.jp
Sumitomo Mitsui DS Asset Management (UK) Limited
100 Liverpool Street, London EC2M 2AT
United Kingdom
www.smd-am.co.uk

Note:
Daiwa SB Investments Ltd. (DSBI) merged with Sumitomo Mitsui Asset ManagementCompany, Limited (SMAM) on 1 April 2019.
CMA: Member of The Securities Analyst Association of Japan.

Disclosures“SMDAM”“Our” / “We” / “Group”“SMDAM Tokyo” /“SMDAM (Tokyo)”“SMDAM UK”“SMDAM (UK)”

These references relate to the entire “Sumitomo Mitsui DS Asset Management Company, Limited” organisation
and will generally be used when referring to matters such as investment philosophy, style, company structure andother policies, which are consistent across the group.

This refers to Sumitomo Mitsui DS Asset Management Company, Limited, the head office of the SMDAM groupbased in Tokyo, Japan. Our Japanese investment team is based in Tokyo and will perform day-to-day
management of client portfolios.
This refers to Sumitomo Mitsui DS Asset Management (UK) Limited, the UK-based subsidiary of SMDAM (Tokyo).
SMDAM (UK) will typically be appointed as investment manager and will delegate day-to-day management ofclient portfolios to SMDAM (Tokyo), SMDAM (Hong Kong) and SMDAM (Singapore), but will retain responsibility
for the management, control and servicing of the client portfolios and relationship.

This report is issued by Sumitomo Mitsui DS Asset Management (UK) Limited. Registered in England and Wales. Registered office 100
Liverpool Street, London, EC2M 2AT; registered number 1660184. Authorised and regulated by the Financial Conduct Authority.

The information in this document is not intended to be investment advice, tax, financial or any other type of advice, and is for general
information purposes only without regard to any particular user's investment objectives or financial situation. It is educational in nature andshould not be interpreted or constituted as an offer, solicitation or recommendation or advice to buy or sell securities or pursue any particularinvestment strategy or investment product in any jurisdiction or country, nor is it a commitment from SMDAM to participate in any of thetransactions mentioned herein. No representation or promise as to the performance of funds or the return on any investment is made. Any
forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, and are based on certain
assumptions and current market conditions that are subject to change without prior notice. The views of SMDAM reflected in this report may
change without notice. In addition, SMDAM may issue other reports that are inconsistent with, and reach different conclusions from, theinformation presented in this report and is under no obligation to ensure that such other reports are brought to the attention of any recipient of
this report.
This document may not be copied, redistributed or reproduced in whole or in part without prior written approval from Sumitomo Mitsui DS
Asset Management (UK) Limited.

Page | 4