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.

June 2021
  • Tadahiro Fujimura
    Tadahiro Fujimura, CFA, CMA
    Portfolio Manager

Fund Performance Review

In May, the Japanese stock market started on an upward trajectory due to recovery expectations for the global economy and favorable earnings from Japanese corporations. In mid-month, share prices saw significant corrections as U.S. long-term interest rates rose more than market expectations due to inflation concerns. The bitcoin crash also had a negative impact on market sentiment. As the month came to a close, share prices rebounded alongside expectations of vaccination progress in Japan and a slowdown in the pace of rising U.S. interest rates as temporary inflation concerns receded. As a result, the Tokyo Stock Price Index rose by 1.21% in May. By comparison, the Russell/Nomura Small CapTM Index fell by 1.25% for the month and the Fund (HJSIX) declined by 0.40%.

One of the best performers during the month was Musashi Seimitsu Industry Co., Ltd., likely because  the market expects its gear sales to increase further with the growth of electric vehicles. Another  positive contributor was SBS Holdings, Inc., which benefited from the expectation of earnings growth as they successfully execute M&A strategy in their logistics business.

Meanwhile, forklift manufacturer and seller  Mitsubishi Logisnext Co., Ltd. negatively contributed to the Fund’s performance. Amid remarkable performance recovery among automotive companies, the company drew a negative response from the market after its earnings fell below expectations. Share price of construction and civil engineering firm KAWADA TECHNOLOGIES, Inc. also declined. Although it outperformed its initial projections in the previous fiscal year, its share price fell likely because it announced significant profit losses in this year’s earnings, partly due to a change in accounting standards. 

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Outlook for June 2021

Companies closing their fiscal year in March generally concluded their earnings presentations with the results that their performance last fiscal year surpassed expectations. On the other hand, various factors are fueling predictions that this year’s earnings recovery will be lower than expected. These factors include uncertainty about the end of the COVID-19 pandemic, a new wave of infections in Southeast Asia, the semiconductor and container shortages, and rising raw material prices. Digital transformation and other stocks that performed well last year have been sluggish due to their association with the relatively poor performance of the U.S. NASDAQ Index and the growing expectations for rising U.S. interest rates. In May, foreign investors also began to sell due to concerns about a relatively delayed recovery in the Japanese economy, holding back the market. 

We don’t think there is need to be pessimistic, as the average stock price has remained strong despite all these adverse factors. Indications show promise for a potential earnings recovery and plentiful Japanese capital flowing into the stock market.

Despite the short-term risks present, our investment strategy is to increasingly invest in equities expected to recover significantly from the adverse effects of COVID-19. As the current fiscal year progresses, we believe the companies that integrate Internet and offline services will emerge at the top of their sectors. Therefore, we intend to focus on companies with high growth potential who are offering such new services.

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