Market Commentary and Fund Performance

Market Commentary and Fund Performance for November 2022

This month, the Japanese stock market started on an upward trajectory due to robust earnings among leading Japanese corporations. Thereafter, prices fluctuated amid shifts in the inflation and interest rate outlook in response to U.S. economic indicators. Mid-month, the U.S. Consumer Price Index (CPI) came in below market expectations and share prices spiked on expectations of a slowdown in the U.S. Federal Reserve Board’s interest rate hikes. Another positive development during the month was the sharp recovery in Asian stocks, including in China, Hong Kong, and Taiwan, due to expectations that China would ease its COVID-19 countermeasures and real estate regulations. As a result, the Tokyo Stock Price Index rose 9.66% month over month, while the Russell/Nomura Small Cap™ Index, the benchmark for the Fund, gained 9.20% over the same period. The Fund’s performance this month increased by 10.10% (HJSIX), outperforming both indices.

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This month, the most significant contributor to the Fund’s performance was automotive electronic component assembler Siix Corporation. Its profit significantly increased year over year (YoY) due to a recovery in automotive industry sales, which had been sluggish, and the benefits of a weaker yen. Semiconductor wholesaler and network service provider Macnica Holdings, Inc. also made gains. Its performance was likely due to upward revisions to its earnings amid solid automotive and industrial sales, benefits from the weaker yen, and higher semiconductor prices. PET bottle production equipment manufacturer Nissei ASB Machine Co., Ltd. also saw its share price rise. Its earnings presentation for this fiscal year reflected higher-than-expected orders for its energy-saving, high-efficiency machinery, given soaring energy prices and heightened environmental awareness.

Meanwhile, connector and semiconductor test socket manufacturer Yamaichi Electronics Co., Ltd. had the greatest negative impact on the Fund’s performance. We believe its performance represented a backlash to its surging share price the previous month and was due to concerns about the semiconductor market. The share price of Nishimoto Co., Ltd., an Asian foods wholesaler to Western markets, also declined. While it has continued to increase profit YoY, its share price fell, likely due to a reaction to the share price gains in H1 of this year and concerns about Western economies. Offshore civil engineering stalwart Penta-Ocean Construction Co., Ltd. also lost ground. Its share price fell due to a downward performance revision resulting from deteriorating profitability in overseas orders.

Outlook for December 2022

Despite ongoing concerns about inflation, its momentum is slowing in the West, and the Yen’s sharp depreciation is also calming. In line with these developments, Japanese companies that had suffered from rising costs are now passing prices through and normalizing production, so we expect their business performance to recover and normalize soon.

Additionally, the number of COVID-19 patients is again on the rise, but economic activity is normalizing, and domestic consumption should recover toward year-end and the new year. We believe that Japan faces a relatively lower risk of recession than overseas.

Foreign investors are also increasingly focusing on Japanese companies, which have significant room to improve their performance, so we expect a capital inflow into the Japanese stock market over the next year.

In an environment where only some stocks with growth potential are rising, our investment strategy will be to increase the Fund’s investment in undervalued stocks with high potential for earnings recovery through price pass-through, production normalization, and other measures. We will also seek out stocks with medium- to long-term growth potential.

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