Market Commentary and Fund Performance

Market Commentary and Fund Performance for July 2020

The Japanese stock market in June continued to gain momentum from the previous month until the middle of the month, rising from higher expectations of corporate performance and the economy bottoming out. However, in the latter half of the month, the market slowed down due to profit-taking as a reaction to the continued rise in prices and fears of re-expansion of COVID-19 infections reignited in the United States and elsewhere. At the same time, a subsector of the industrial sector, which had been lagging behind in terms of share price performance, also rose. As a result, the Tokyo Stock Price Index (TOPIX) was almost flat with a 0.33% decline from the end of the previous month, and the benchmark of the Fund, the Russell/Nomura Small Cap™ Index, fell 1.82%. Large-cap stocks performed relatively well. However, due to the continued active influence of individual investors, emerging growth-related stocks such as digital products and bio products were relatively strong. The Fund’s performance was -1.02% (HJPSX), slightly above the benchmark.

One of the stocks that positively contributed to Fund performance this month is Lifenet Insurance Company, an Internet-only life insurance company. We believe that the number of new contracts is rapidly growing due to the impact of COVID-19, which has been reflected in its rising share price. The share price of Kito Corporation, a manufacturer of transportation equipment for factories and construction, performed well because of the favorable outlook due to the re-opening of economic activities in China and North America.

On the other hand, one of the stocks with a negative contribution to Fund performance this month was Matsuoka Corporation, which produces apparel through its Original Equipment Manufacturer segment. We believe that the market has disliked the negative effect of COVID-19 for some time on the apparel industry. Share prices of Digital Garage, Inc., which handles payments, advertisements, venture capital investments, etc., and Nippon Koei Co., Ltd., a general construction consultant, both suffered from profit-taking after their share prices rose continuously.

Market Outlook

As economic activity resumes, stock prices have risen sharply and have almost recovered due to forward-looking market expectations. However, we cannot be overly optimistic due to concerns over factors such as the sustainability of recovery in economic activity, the slump in final demand, and the re-expansion of COVID-19 infections. In addition, tensions between the United States and China have risen due to the revision of the law in Hong Kong. Looking at the stock market, the stock prices of high-growth digital- and bio-related stocks are rising sharply, while their valuation gap with other stocks such as cyclicals and manufacturing is expanding. Thus, we would like to increase the weights in these relatively cheap stocks, while paying attention to long-term earnings trends. In addition, we anticipate that business closures and mergers and acquisition activities will pick up as the real economy potentially deteriorates going forward. We would therefore like to discover and invest in companies that can take advantage of these activities.