Market Commentary and Fund Performance

Market Commentary and Fund Performance for January 2023

This month, the Japanese stock market declined amid rising concerns about an economic recession due to two factors: the Manufacturing ISM Report on Business announced in the U.S. at the beginning of the month was the lowest it had been in 31 months, while the China Purchasing Manager’s Index (PMI) also remained low. However, it rallied following the Bank of Japan’s (BOJ) announcement at its monetary policy meeting that it would maintain large-scale monetary easing. Near month-end, a U.S. Federal Reserve Board governor expressed support for easing the range of interest rate hikes, and reports in leading U.S. newspapers speculated on an early halt to these hikes, leading to solid market performance. As a result, the Tokyo Stock Price Index rose 5.95% month over month, while the benchmark for the Fund (the Russell/Nomura Small Cap Index) gained 4.58% over the same period. The Fund’s performance this month increased by 6.49% (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 Materials while the Energy sector detracted from the Fund’s performance.

Stocks that positively contributed to the Fund’s performance this month were concrete pile manufacturer and installer Asia Pile Holdings Corporation and auto parts manufacturer Musashi Seimitsu Industry Co., Ltd. Asia Pile announced an upward revision to its earnings as construction demand recovered. Musashi Seimitsu’s share price climbed as a rebound from the previous month’s drop and on the back of expectations for a recovery in Chinese production. Meanwhile, stocks with a negative impact on the Fund’s performance were hospital-oriented consulting firm Ship Healthcare Holdings, Inc. and Japan and Southeast Asia-based financial services provider AEON Financial Service Co., Ltd. There was no news specifically mentioning Ship Healthcare, but its share price fell, likely as a backlash to its strong performance last year. AEON Financial Service suffered at the market’s apparent bearishness due to lower than expected Q3 earnings.

In terms of the Fund activities, we added two new investments and fully divested one stock. We partially sold some names that made gains and increased the portfolio’s weight in primarily domestic demand stocks.

Outlook for February 2023

Shaken by the BOJ’s policy change in December, securities markets recovered their composure in January when the BOJ did not make any policy changes. Furthermore, it became clear that the policy change in December was not intended to end monetary easing or raise interest rates, bringing investors a greater sense of security. Despite January’s recovery in global stock markets, Japanese equities continued to lag. Investors appear to have not yet accounted for the recovery that will accompany China’s economic normalization. Notably, small- and mid-cap stocks are not overheated and should continue to perform relatively well.

We have not made any significant changes to our investment strategy. In an environment where sales are recovering among a wide range of companies, we intend to identify and expand investments in stocks left undervalued among companies that can achieve profit growth in response to rising costs, including wages. We will also focus on companies that can respond to the circumstances demanding aggressive investment in supply chain reviews, labor savings, and environmental responsiveness.

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