Market Commentary and Fund Performance

Fund Performance Review

In early January the Japanese stock market, continuing its year-end momentum, performed well thanks to substantial gains in U.S. equities due to expectations for significant economic stimulus on the back of the Democratic Party’s win in the U.S. Senate. Nevertheless, toward the end of the month, increased profit taking and concerns about rising interest rates led to turbulent price fluctuations. As a result, the Tokyo Stock Price Index (TOPIX) declined by 1.16% month-over-month, while the Russell/Nomura Small CapTM Index declined 0.82% over the same period, with little difference between large- and small-cap stocks. The Fund’s performance (HJSIX) declined by 2.58%, underperforming its benchmark by roughly 1%.

The most significant contributor to the Fund’s performance this month was Hito Communications Holdings, Inc. As it gradually shifts its recruiting business toward e-commerce-related sectors, the firm’s outstanding performance likely led to market bullishness. Leading call center operator Bellsystem24 Holdings, Inc. saw its share price rises due to its strong business performance and expectations that subsidies and other government-related income will continue.

Conversely, internet-based firm Digital Garage, Inc. had the worst performance. Its share price fell, likely due to rising concerns about its start-up investments, which was caused by price corrections among some emerging equities. Biomass power station operator EF-ON Inc. also saw its share price fall. This decline was likely a response to its share price’s growth over the past few months due to growing expectations for renewable energy. Used condominium seller Star Mica Holdings Co., Ltd. appears to have suffered due to bearishness about its year-end forecast’s profit decline.

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Market Outlook for February 2021

With the end of the U.S. presidential election and the start of COVID-19 vaccinations, we expect new developments in the stock market this year. While Japan is seeing declining approval rates for the Suga administration, the country will likely require new government policies. We believe that all nations will continue their monetary easing and stimulus policies for the time being, and the stock market is starting to anticipate future developments.

Within these circumstances, we are optimistic about the Japanese stock market because it is relatively undervalued. We believe that small-cap stocks hold increasing investment appeal compared to some overvalued emerging equities. On the other hand, we believe that concerns about growth-potential stocks benefiting from low interest rates due to excessive monetary easing will gain prominence. Therefore, we think that the Fund needs to invest mainly in stocks that offer higher earnings potential even after low interest rates come to an end in a post-COVID-19 world. Our management strategy is to keep divesting from stocks that have seen continued, significant share price increases because we believe that profit-taking pressure will become fierce. At the same time, we will expand the Fund’s investment in financially sound stocks that promise growing market share among the manufacturing, domestic demand, and service firms that struggled throughout last year.

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