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.

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

Market Commentary and Fund Performance for October 2022

The Japanese stock market started the month on an upward trajectory amid rising overall market confidence due to diminished fears about a deteriorating fiscal situation in the U.K. after the British government withdrew part of its tax cut plan announced at the end of September. In mid-month, the U.S. Department of Labor announced an unemployment rate below the market forecast, and there were signs of increased caution about rising interest rates. However, stock prices held ground as leading U.S. banks presented financial results above market expectations. Later, increased observation about spiking interest rates and solid earnings announcements from leading Japanese companies fueled an upturn, with share prices ending the month higher than they began. As a result, the Tokyo Stock Price Index with dividends rose 2.35% month over month, while the benchmark for the Fund, the Russell/Nomura Small Cap™ Index, gained 0.16% over the same period. Some of the benchmark stocks faced a backlash to the previous month’s gains, dragging down the rise in small caps below the market’s overall growth. The Fund’s performance this month decreased by 0.84% (Institutional Class), underperforming its benchmark.

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The month’s positive performers among the Global Industry Classification Standard (GICS) sectors included shares of Information Technology, Industrials, and Health Care, while Communication Services and Real Estate detracted from the Fund’s performance.

The most significant contributor to the Fund’s performance this month was connector and semiconductor test socket manufacturer Yamaichi Electronics Co., Ltd. Its rally was likely driven by a reaction to the previous month’s decline and a reassessment of the semiconductor-related market. Ledger sheet software developer and seller WingArc1st, Inc. saw its share price buoyed by a surge in demand thanks to legal reforms and other benefits and the announcement of H1 results that outperformed forecasts. Automotive parts producer Musashi Seimitsu Industry Co., Ltd. saw a rebound from the share price decline in September and rising expectations for electric vehicle (EV) parts. Meanwhile, the stock with the greatest negative impact on the Fund’s performance was professional staffing provider Creek & River Co., Ltd. While its sales continued to be solid in the announced Q2FY2/2023 earnings, its profit declined due to more aggressive upfront investment than in the previous year. This profit decline, alongside profit-taking due to the year over year (YoY) share price rise, appeared to drive the share price down. Amusement facility operator AEON Fantasy Co., Ltd. also declined. It was partially due to a backlash to previous share price gains, but the market also appeared disappointed by the fact that the firm’s Chinese business was the only region with continued losses due to the lockdown in China while other regions recovered. Used condominium trader Star Mica Holdings Co., Ltd. continued to post increased revenue and profit, but its share price fell, likely due to concerns about a sluggish growth rate and the adverse impact of rising interest rates. This month, we invested in two consumer discretionary stocks on our expectations for a recovery in demand in Japan. At the same time, we fully divested a housing-related firm.

Outlook for November 2022

Despite growing concerns about an economic recession in Europe and the U.S., energy and commodity prices have calmed down, and cost-increasing factors are declining, except for the yen’s depreciation. Moreover, consumer and inbound spending has significant room for recovery as post-COVID-19 economic activity normalizes. While the September interim results do not show much of an overall trend, we believe the upward trajectory will become apparent and act as a tailwind for the stock market. Small- and mid-cap stocks performed poorly in October amid a backlash to September, but we expect share prices to rise toward year-end based on expectations for the next fiscal year. Our strategy remains to invest in stocks with high growth potential and low overvaluation among those that have fallen sharply. We also intend to continue increasing our investments in companies that would benefit from normalization in the Japanese economy, outweighing inflation factors and the negative impact of overseas economies.

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