Market Commentary and Fund Performance for September 2022
This month, the Japanese stock market started on a downward trajectory. In addition to continued high inflation rates in the West, rising concerns about the escalation of the U.S.–China confrontation in the semiconductor field caused share prices to fall, especially in high-tech stocks. Federal Reserve Board Vice Chair Dr. Lael Brainard made comments that were perceived as cautious toward future interest rate hikes, and stock prices responded with the occasional rebound. Near the end of the month, the Federal Open Market Committee (FOMC) meeting exhibited a stronger-than-expected stance toward continued monetary tightening, spurring a decline in share prices, with the month ultimately ending lower than it began. As a result, the Tokyo Stock Price Index fell by 9.49% month over month, while the benchmark for the Fund, the Russell/Nomura Small Cap™ Index, declined by 6.79% over the same period, limiting its losses. The Fund’s performance declined by 6.17% (HJSIX), staying in line with its benchmark.
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The Fund’s most significant performer this month was home mortgage-related service provider Aruhi Corporation. Its share price spiked after SBI Holdings announced a takeover bid more than 40% higher than the previous day’s price. Bag and purse retail chain operator Sac’s Bar Holdings Inc. also contributed. Bag sales had been sluggish due to the COVID-19 pandemic, but they have recovered due to a rebound in travel demand. Thus the share price should climb in anticipation of its improved performance. Ship Healthcare Holdings, Inc., a broad-based hospital-related business operator, has not yet recovered its performance, but we believe that it should recover as COVID-19 measures in hospital operations decreases and operations normalize.
Meanwhile, smartphone and personal computer peripheral designer and seller Elecom Co., Ltd. was the stock with the greatest negative impact on the Fund’s performance due to the weak yen. Performance of Yamaichi Electronics Co., Ltd., connector and semiconductor test socket manufacturer, was a backlash to its significant share price gains the previous month and growing concerns about the semiconductor industry. Semiconductor production equipment manufacturer Towa Corporation also saw its share price drop amid performance concerns for the semiconductor industry.
This month, we made four new investments in capital equipment-related stocks and another in an IT service provider for a total of three new positions. At the same time, we fully divested two automotive parts companies and a service sector stock.
Outlook for October 2022
Despite the risk of a recession in the West, we believe the Japanese stock market will remain relatively robust because it is highly undervalued, and there is significant room for Japanese companies to recover earnings. The adverse impact of rising energy and commodity prices—more fuel for concern—will be a factor in improving earnings going forward, as these prices have peaked, and pass-through is progressing among Japanese corporations. 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 while offsetting inflationary factors.
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