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.

July 2023
  • Tadahiro Fujimura
    Tadahiro Fujimura, CFA, CMA
    Portfolio Manager

Market Commentary and Fund Performance for June 2023

The Japanese stock market rose sharply early in the month, reflecting the trend toward higher U.S. stock prices due to that country suspending its federal debt ceiling. Mid-month, the market fluctuated for several reasons. The downswings were due to poorly performing U.S. equities stemming from hints of the Federal Reserve Board (the Fed) making additional interest rate hikes and unmet expectations for the dissolution of the Japanese House of Representatives. The Bank of Japan (BOJ) maintained the monetary easing policy, and a prominent U.S. investor announced additional investments in Japanese stocks, fueling the upswings. As the month ended, share prices temporarily declined as a backlash to their previous spike. Still, the pullback in concerns of a U.S. recession and the yen’s depreciation provided support, allowing the market to end higher than where it began. As a result, the Tokyo Stock Price Index rose by 3.96% month over month, and the benchmark for the Fund, the Russell/Nomura Small CapTM Index rose by 2.38% over the same period. The Fund’s performance this month also rose by 2.94% (HJSIX), outperforming its benchmark.

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This month, positive contributors to the Fund’s performance included large format inkjet printer manufacturer and distributor Mimaki Engineering Co., Ltd. and industrial and propane gas supplier, Iwatani Corporation. Mimaki Engineering’s share price climbed on rising expectations that its performance would improve due to the weak yen and economic recovery in the West. After the government announced its hydrogen strategy, Iwatani Corporation saw its share price increase amid boosted expectations for future performance.

Conversely, negative contributions came from children’s amusement facility operator Aeon Fantasy Co., Ltd. and employee benefits outsourcing contractor, Benefit One Inc. Aeon Fantasy’s monthly sales recovery was below expectations, raising concerns about its performance. While no specific news mentioned Benefit One, its share price dropped, likely due to growing disappointment with the earnings forecast it announced for the current fiscal year in May.

We did not wholly divest any companies this month. We made one new investment in the construction sector on expectations for earnings recovery.

Outlook for July 2023

The Japanese stock market has been attracting attention as an alternative investment destination to China, especially among foreign investors. It has risen sharply since the year began. The BOJ’s ongoing monetary easing and the weakening yen have also seeked to boost business performance, especially in export-related industries. However, we do not believe that the sustained rally seen so far will continue. That is because interest rates seem to peak out as Western economies slow down, and the Chinese economy looks primed to rebound. Meanwhile, we believe that Japanese small caps should continue to have high investment appeal, because they are significantly undervalued compared to large caps, and many exhibit marked performance recovery. While we do not plan any significant changes to our investment policy, we remain cautious about stocks that have rallied sharply. However, we will expand the Fund’s holdings in undervalued stocks, especially those related to domestic demand. Our focus will primarily be on companies that seek to generate profit growth despite inflation, rising wages, and labor shortages.

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