Market Commentary and Fund Performance

Tad Fujimura of Tokyo-based SPARX Asset Management Co., Ltd., sub-advisor to the Hennessy Japan Small Cap Fund, shares his insights on the Japanese market and Fund performance.

April 2022
  • Tadahiro Fujimura
    Tadahiro Fujimura, CFA, CMA
    Portfolio Manager

Market Commentary and Fund Performance for April 2022

The Japanese stock market started the month on a decline due to concerns about a global economic downturn. These concerns stemmed from the tense situation in the Ukraine since the second half of February; Japanese, American, and European announcements of economic and financial sanctions against Russia; and a sharp rise in crude oil prices. However, the market reversed its course after the yen depreciated mid-month.  This trend followed the Federal Reserve Board’s (FRB) decision to raise interest rates as the Bank of Japan maintains its monetary easing policy. Other factors in the turnaround included a lull in rising resource prices and a retreat from excessive concerns over the Ukrainian situation. Recovery in global stock markets also fueled the significant share price growth. Toward the end of the month, share prices again experienced a backlash against the mid-month spike. Nevertheless, the Tokyo Stock Price Index (TOPIX) declined 1.03% in March, while the Fund’s benchmark, the Russell/Nomura Small Cap™ Index, declined by 4.01%. Its poor result stemmed from small caps rising slowly amid a robust, futures-led rally in large caps. The Fund (HJSIX) declined 6.90%.

In March, the most significant contributors included a biomass power station operator and waste recycler TRE Holdings Corporation and a professional personnel staffing and contracting service provider, Creek & River Co., Ltd. The market appears to have appreciated TRE Holdings’ continued solid performance aided by rising scrap steel prices. The market responded positively to the Creek & River’s upward profit revision, as creative work becomes more efficient due to data exchange. General digital service provider Digital Garage, Inc. saw its share price rebound, likely due to expectations for improved returns in its start-up investments.

Meanwhile, Kyoei Steel Ltd. was the most negative contributor to the Fund’s performance. The company produces steel bars using electric furnaces. Its share price declined amid concerns about delays in profit recovery due to rising costs in the scrap steel it uses as raw materials. Primarily Honda-oriented automotive parts producer Musashi Seimitsu Industry Co., Ltd. was also a negative contributor to the Fund’s performance. No news mentioned the firm specifically. However, reports that the semiconductor and parts shortages are driving down overall production in the automotive industry appear to have increased pessimism toward Musashi Seimitsu’s performance. Ship Healthcare Holdings, Inc., which offers a wide range of products and services to primarily large hospitals, saw its share price fall. This decline was likely due to pessimism after it announced a downward earnings revision amid sluggish medical equipment sales caused by parts shortages and COVID-19. 

We did not make any new investments this month. We increased the Fund’s position in some manufacturers that saw significant share price losses and service providers that should experience few adverse effects from inflation. Meanwhile, we partially divested stocks whose performance has been relatively steady.

Click here for full, standardized Fund Performance.

Outlook for April 2022

We expect to see many pessimistic earnings forecasts for Japanese companies in the new fiscal year. These forecasts stem from rising commodity prices and parts shortages, making a significant short-term turnaround unlikely in the stock market. However, we believe further downside risk in the market is minimal because earnings should improve significantly in the second half of 2022 and beyond due to pass-through pricing, parts shortage resolutions, and economic normalization. Furthermore, the weighty selling pressure present during the dip after the Russian invasion of Ukraine appears to have peaked. As a result, investments in undervalued stocks and stock buy-backs should underpin the market. Small caps’ lagging performance should allow far more recovery than in large caps. Our investment strategy is to increase the Fund’s weighting in stocks we believe are undervalued following the sharp market decline. Specifically, we intend to selectively invest in companies that can remain highly inflation-responsive and keep up with medium-term  social changes.

Click here for Fund Holdings.

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1 USD = 105.36 Yen as of 07/27/2020 (Media - Ticker - M. Takeda)

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