Market Commentary and Fund Performance

Market Commentary and Fund Performance for March 2023

Early in the month, as the U.S. stock market performed poorly amid concerns that the Federal Reserve Board would again step up interest rate hikes, the weak yen underpinned Japanese equities. Toward mid-month, the market fell sharply as risk aversion intensified in response to the sharp increase in financial instability in the West triggered by U.S.-based Silicon Valley Bank’s bankruptcy. However, by month end, UBS acquiring Credit Suisse, U.S. authorities issuing deposit protection, and other developments eased concerns about the financial system, allowing the market to end the month above where it began. As a result, the Tokyo Stock Price Index rose 4.09% month over month, while the benchmark for the Fund, the Russell/Nomura Small CapTM Index rose 3.84% over the same period. The Fund’s performance this month increased by 4.76% (HJSIX), outperforming its benchmark.

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

This month, the primary positive contributor to the Fund’s performance were a forklift production company Mitsubishi Logisnext Co., Ltd., a semiconductor production equipment used in back-end processes company Towa Corporation, and an automotive parts production company Musashi Seimitsu Industry Co., Ltd. Mitsubishi Logisnext rose because of the possible expectations that the firm would benefit from news about its competitor committing fraud. Towa’s share price rose for its backlash after the share price fall and also the market expects the company to benefit from semiconductor plant expansion. Musashi Seimitsu rose due to the expectations for recovery in automobile production, primarily in China, especially toward EV growth.

Conversely, the stocks with the most significant negative impact on the Fund’s performance were a regional bank based in Saitama Prefecture, Musashino Bank, Ltd., a leading PET bottle molding machine manufacturer Nissei Asb Machine Co., Ltd. and an employee benefits outsourcing contractor Benefit One Inc. Musasino Bank’s share price declined due to the backlash that its share price rose and growing credit concerns about overseas banks. Nissei ASB declined for the potential concerns about the global economic downturn due to rising financial instability. There were no specific reasons for Benefit One.

This month, we wholly divested one stock in Consumer Staples and made a new investment in a Financials company.

Outlook for April 2023

While we are not optimistic about concerns over overseas economies due to the credit concerns over foreign banks and rising interest rates in March, we think the impact on Japanese companies will be minimal as Japan continues its monetary easing policy. Instead, we should expect a recovery to a full-fledged pre-COVID economy, as there are many bright spots, including a pronounced upward wage trend in the new fiscal year and a recovery in inbound demand from China. Moreover, the ongoing momentum to review companies with price to book ratios (P/B) below 1x should remain a tailwind for small-caps. We have not made any significant changes to our investment strategy. With sales likely to recover in a wide range of stocks, we intend to increasingly invest in stocks that have the potential for substantial earnings growth even under inflation. We will also seek out undervalued companies that aggressively improve profitability, especially in the domestic demand sector.

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