Market Commentary and Fund Performance

Fund Performance Review

In October, the Japanese stock market rose in the first half of the month on economic stimulus expectations, but it ended the month down. This was likely due in part to Western stock markets’ concerns about the re-emergence of COVID-19 outbreaks, as well as a reluctance to buy aggressively ahead of the U.S. presidential election. Japanese companies began to release their interim results, which may have exceeded many conservative expectations but failed to shore up the overall market. As a result, The Tokyo Stock Price Index (TOPIX) declined month-over-month by 1.92%, while the Fund’s benchmark, Russell/Nomura Small Cap Index, declined by 2.62% over the same period. The Fund’s performance declined by 0.26% (HJSIX).

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This month, Industrial gas manufacturer and distributor Iwatani Corporation contributed positively to the Fund’s performance. We believe that Prime Minister Yoshihide Suga administration’s policy of reducing CO2 emissions has focused attention on hydrogen-related businesses, and this has raised awareness of Iwatani, which mostly handles liquefied hydrogen. Expectations for biomass power generation due to the Suga administration’s policy of reducing CO2 emissions may have driven up the share price of EF-ON Inc., a biomass power plant operator. The company also announced in June higher profits in its year-end projections. We believe that semiconductor-oriented chemical manufacturer Tokyo Ohka Kogyo Co., Ltd. received high valuations after it announced an upward revision to earnings due to robust semiconductor production. 

Among the stocks negatively contributing to the Fund’s performance were call center giant Bell System24 Holdings, Inc., which announced solid earnings, but whose share price fell likely as a reaction to its previous growth. Italian restaurant chain operator Saizeriya Co., Ltd. reported lower-than-expected earnings due to its continuing struggle with sales amid the COVID-19 pandemic.

Outlook for November 2020

It has become clear that Japanese corporate performance in a wide range of industries has bottomed out, thanks partly to the Chinese economic recovery. Although the second wave of COVID-19 infections is a concern, the impact on the Japanese economy appears to be minimal, because the pandemic has stabilized in Japan and Asia. On the other hand, continued U.S.–China tensions could be a risk, regardless of the pandemic’s impact on the West and the result of the U.S. presidential election. 

Under these circumstances, I believe that the Japanese stock market has plenty of room for investments in Japanese stocks from foreign investors. There could also very well be a shift of capital to Japanese equities due to the impact of further infections in the West. A change is also getting underway in stocks with upward momentum, which had been dominated by digital-related stocks. 

Nevertheless, we believe the end of the year will bring a healthy appetite for speculation in Japanese stocks overall, many of which are in a slump despite their earnings recovery. Under the assumption that the COVID-19 pandemic is approaching its end, our investment strategy is to expand the Fund’s holdings in stocks that are highly undervalued after their earnings have recovered, while continuing to divest stocks that have recently made significant gains. We also intend to uncover and invest in stocks with what we believe to have high growth potential fueled by the structural changes caused by digital transformation and deregulation.

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