Impact of COVID-19 on the Japanese Market

Tokyo-based SPARX Asset Management Co., sub-advisor to the Hennessy Japan Funds, shares insights and thoughts as they react to the impact of COVID-19 on the Japanese market.

March 2020
  • Masakazu Takeda
    Masakazu Takeda, CFA, CMA
    Portfolio Manager
  • Tadahiro Fujimura
    Tadahiro Fujimura, CFA, CMA
    Portfolio Manager
  • Takenari Okumura, CMA
    Takenari Okumura, CMA
    Portfolio Manager

We would like to share some thoughts from our Investment Team on the impact COVID-19 has had on the Japanese equity markets. Over the last 3 weeks starting on February 25 and ending on March 13, the major Japanese equity market indices TOPIX and Nikkei Stock Average experienced sharp declines of -24.6% and -25.5%, respectively. The fall in stock prices is mainly attributable to the worldwide spread of COVID-19, and accentuated by a sharp fall in oil prices triggered by OPEC’s lack of consultation, which spurred the turmoil in financial markets.

The current level of the Nikkei Stock Average suggests that, based on an average Price to Earnings ratio over the past 10 years, the total net income of companies comprising the index will decrease by about -28%. According to SMBC, Nikko Securities’ estimation (report issued on March 10), should the pandemic continue for 6 months from February to July with the Olympic Games being canceled, the net income of listed companies is forecasted to decline by up to -24.4%. This is a somewhat simplified calculation, but based on these forecasts, it can be said that the current stock market has already factored in the cancellation of the Olympic Games.

Despite this rough picture of the current situation, it is important to emphasize it’s continuously changing. Going forward, there may be both negative factors such as the prolonged stagnation of economic activities due to further infection, as well as positive factors such as additional economic stimulus measures or the identification of a vaccine. Further declines or a rapid recovery to levels before the COVID-19 outbreak are both possible scenarios, and therefore, we need to continue to monitor the situation as unpredictable.

We believe that the mission of active fund managers is to contribute to the security of beneficiaries and the stability of the capital market by calmly assessing the current situation and making investment decisions based on rational expectations. Under these circumstances, one of our shareholders, who has consistently supported SPARX since our establishment 30 years ago, visited our office last week and gave us the following message of encouragement. “There’s no answer to what to do in a world that is uncertain about the COVID-19 impact. What we should do is think seriously about how to act now. In a time like this, do not be pessimistic but carry on steadily with what you were planning to do. There are things that you can control and things that you cannot control in the world. Most things are out of your control, yet for those things that you can control, there are still quite a few things that can be done. We should try to improve every day, where today is better than yesterday, and tomorrow will be better than today. So in that sense, I will do things that I can control first such as saying thank you to people around you if they did something good, and help if anyone is in trouble. As we cooperate, help each other, and say thank you, one plus one becomes three or four or even five instead of two. Then, I believe we will surely see the end of the tunnel even if we cannot see it now. We just have to continue to move forward. “

Same as our shareholders have done, the role of investment managers is to support the creation of corporate value in the medium to long term is to trust and encourage the companies in which we invest. Through the recent turmoil and dialogue with shareholders, we have reconfirmed our recognition of our role and raised the quality of our activities to benefit our investors over the mid- to long-term.

We will continue to make bottom-up, selective investments in companies in whatever market environment, and will be consistent with our investment philosophy. We look forward to your continued support.