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.

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

Market Commentary and Fund Performance for August 2022

In August 2022, monetary policies in the west influenced the Japanese stock market, but it saw month-over-month growth due to a sense of undervaluation and expectations of recovery. Early in the month, concerns about the worsening situation between the U.S. and China emerged following U.S. Speaker of the House Nancy Pelosi’s visit to Taiwan. Still, the market remained stable, underpinned by robust domestic earnings reports and U.S. economic indicators. The stock market in the mid-month rallied as the slowdown in the rise of the U.S. consumer price index (CPI) reduced expectations of a hefty interest rate hike. At the end of the month, the stock market took a downturn amid concerns about economic recession caused by soaring energy prices in Europe and the Federal Reserve (U.S. Fed) reiterating its hawkish stance on monetary tightening. Nevertheless, the market closed the month above where it started. As a result, the Tokyo Stock Price Index (TOPIX) declined by 2.42% in August, while the benchmark for the Fund was down by 2.17% over the same period. The Fund’s (HJSIX) performance this month declined by 1.83%, outperforming its benchmark.

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This month, the most significant contributor to the Fund’s performance was automotive parts producer Musashi Seimitsu Industry Co., Ltd. Its Q1 earnings were poor due to production cuts by automobile companies, but its share price rose likely on expectations of future production recovery as part shortages resolve. Connector and semiconductor test socket manufacturer Yamaichi Electronics Co., Ltd. saw share price gains because its test sockets have performed well, leading to an upward revision to its earnings. Amusement facility operator AEON Fantasy Co., Ltd. likely benefited from an uptick in sales, which had suffered under COVID-19’s impact last year, with July sales increasing by 15% year over year (YoY).

Meanwhile, software developer and seller WingArc1st Inc. was the most negative contributor to the Fund’s performance. Its share price declined in a backlash against a previous rise fueled by robust earnings the previous month. Education and nursing care firm Benesse Holdings, Inc. had operating profit in line with its projections, but the market was bearish about a continued net loss in Q1 due to a decline in Shinkenzemi membership and higher costs. Internet advertiser ValueCommerce Co., Ltd. continues to post YoY profit growth, but its share price fell likely due to concerns about a slowing growth rate. We made a few new investments this month. We fully divested two stocks that had performed well through last year due to our belief that their share prices had reached sufficient parity with their actual value.

Outlook for September 2022

While European and U.S. stock markets declined in August amid renewed concerns over rising interest rates, Japanese equities maintained a positive trend. We believe that was due to Japanese corporate earnings getting on the road to recovery, with significant room for improvement compared to the previous year. Japanese stocks being highly undervalued also played a role. This trend should continue, with Japanese equities gaining value as the recovery in automobile and other production materializes in the second half of this year due to material and fuel prices reaching their peak and parts shortages resolving. 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.

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