Market Commentary and Fund Performance

Fund Performance Review

The Japanese stock market started the month on a downward trend due to the fourth declaration of a state of emergency in Tokyo. In mid-month, falling U.S. long-term interest rates fueled rising U.S. share prices, which also helped Japanese stocks recover. Nevertheless, the market declined even further as a leading Taiwanese semiconductor firm’s earnings did not fulfill market expectations, and another wave of COVID-19 drove rising concerns about economic recovery. Some stocks saw their share prices rise after Q1 fiscal year (FY) March 2022 earnings reports and solid figures from semiconductor and automotive firms. However, reports of tighter government controls on leading companies in China, including major Internet-related firms, triggered a downturn at the end of the month. As a result, the Tokyo Stock Price Index declined 1.07% in July, and the Russell/Nomura Small Cap™ Index, the Fund’s primary benchmark, fell 0.78% over the same period. The Fund’s performance this month increased 2.23% 
(HJSIX), outperforming its benchmark.

This month’s most positively contributing stock was biomass power plant operator and industrial waste recycler Takeei Corporation. Positive factors for the firm appear to be its announcement of double-digit profit growth in Q1 FY3/2022 and the market’s recent attention on renewable energy. Similarly, biomass power plant operator EF-ON Inc. saw massive share-price gains. 

Meanwhile, the stock that had the largest negative impact on the Fund’s performance was Digital Garage, Inc., a provider of a broad range of Internet services. It saw its share price fall, likely due to past gains. However, it could have also suffered due to the market’s wariness about lost value in crypto assets, as the firm handles Bitcoin-related services. Sales subcontractor and human resources service provider Hito-Communications Holdings, Inc. made an upward performance revision due to increased vaccine-related work. However, its share price dropped likely due to profit taking. We did not make any new investments this month. We completely divested two stocks whose earnings outlooks deteriorated. 

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Outlook for August 2021

As the Tokyo Olympics got underway, the new wave of COVID-19 was notable. While the market is bullish about Q1 FY March 2022 earnings, concerns about future deterioration are increasing. China, which had been driving the global economic recovery, is showing signs of slowing growth, and Southeast Asia is struggling. The Japanese stock market has performed worse than stocks in the U.S. and other countries, representing a lag in the current economic recovery. On the other hand, we believe that Japanese equities are undervalued and that there is much room for economic recovery. That said, investments need to account for the end of COVID-19. In terms of our investment strategy, we will continue selling stocks that have become notably overvalued and those that have performed well in the past. At the same time, we would like to invest and increase the portfolio’s weight in companies that are seeking significant profit gains by responding to new lifestyles and changes oriented toward realizing carbon neutrality.

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