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.

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

Market Commentary and Fund Performance for July 2022

The Japanese stock market started the month on a downward tick due to rising concerns about a U.S. recession as spiking interest rates meant to curb inflation. Subsequently, the market moved up and down due to the Federal Open Market Committee (FOMC) minutes turning out as expected and expectations for economic stimulus measures from the Chinese government. However, the stock market rallied in response to the Liberal Democratic Party capturing the sole majority in the Upper House election, the yen weakening significantly for the first time in about 24 years, and excessive inflation fears fading in the U.S. Meanwhile, the growth of COVID-19 infections in China weighed down this rally. At month-end, there were signs that the Fed may ease the pace of interest rate hikes in the future. The Bank of Japan’s (BOJ) monetary policy meeting also decided to maintain the status quo in its monetary easing policy. These factors served as a tailwind, allowing the stock market to end the month above where it began. As a result, TOPIX with dividends rose 5.43% month over month, while the benchmark for the Fund gained 6.19% over the same period. The Fund’s performance (HJSIX) this month increased by 5.89%.

This month, the greatest contributor to the Fund’s performance was Creek & River Co., Ltd., a developer of new businesses through a network of creators and professionals, also posted strong Q1 FY2/2023 results, which likely fueled its improved share price. Form-creation software seller WingArc1st Inc. also gained share price value thanks to solid Q1 FY2/2023 earnings fueled by the shift to paperless operations.

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Meanwhile, the most significant negative impact continued from the previous month with biomass power station operator and industrial waste recycler TRE Holdings Corporation. No particular news emerged during the month, but the firm’s share price fell likely as a backlash to its sharp increase in H1 this year and continued profit-taking from institutional investors. Internet advertiser ValueCommerce Co., Ltd. posted robust earnings. However, its share price fell, likely due to management’s concerns about future performance. Leading used condominium refurbisher and seller Star Mica Holdings Co., Ltd. reported solid interim results at the end of June, but profit-taking likely fueled its share price decline.

This month, we made a new investment in an electronic materials manufacturer. At the same time, we fully divested a manufacturer and a service industry company due to our belief in their limited potential for share price growth.

Outlook for August 2022

Market attention has shifted from concerns about monetary tightening to worries about the real economy due to another COVID-19 wave and economic recession concerns in the West. Meanwhile, Japan’s economy is still normalizing from the pandemic rather than recessionary concerns. The part and semiconductor shortages and rising raw material prices, which had fueled concerns, are now improving. As a result, we do not believe pessimism is necessary regarding the Japanese economy and corporate performance. Our strategy remains to invest in stocks with high growth potential and low overvaluation among those that have fallen sharply. We also intend to increase our investments in companies that can remain highly responsive to the depreciating yen and inflation and keep up with medium-term social changes while significantly benefiting from the Japanese economy’s recovery.

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