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

Market Commentary and Fund Performance for May 2022

This month, the Japanese stock market started on a downward trajectory. The primary cause was a downward trend in U.S. stocks following the Federal Reserve’s (FRB) decision to raise interest rates by 0.5% and reduce its asset holdings. Mid-month, the stock market began to rebound as the U.S. consumer price index growth slowed and U.S. long-term interest rates fell on the prospect of a slowdown in FRB rate hikes. As month-end neared, economic stimulus measures in China, reports of easing COVID-19 restrictions, and the growth strategy in the Kishida administration’s draft “New Capitalism” action plan were well received. As a result, the stock market ended the month above its initial value. As a result, the Tokyo Stock Price Index (TOPIX) rose 2.64% in May. 

Click here for full, standardized Fund Performance.

The most significant contributor to the Fund’s performance this month was heavy-duty chain and pulley manufacturer Kito Corporation. Its share price climbed on the back of its announced tender offer. Nishimoto Co., Ltd. mainly exports Asian food products to the West. Its share price rose due to larger-than-expected pass-through pricing and a considerable upward revision to its full-year earnings. 

On the other hand, the stock with the most significant negative impact was Septeni Holdings Co., Ltd. The company posted outstanding operating profit growth of 63% in its Q2 fiscal year (FY) 9/2022 earnings report, but the market appears to have been bearish about the decline in profits from Q1. Software developer BIPROGY Inc. forecast a 5.7% increase in operating profit but a lower year over year (YoY) profit growth rate in its FY3/2023 projections, fueling its share price drop. 

This month, we made two new investments. One was in a service-related stock that should experience sales growth as the economy returns to normal. The other was a software-related company that should benefit from regulatory changes that will promote digital transformation. Meanwhile, we completely divested a firm due to the poor outlook for the future of its Chinese business.

Outlook for June 2022

Lagging behind other countries, Japan has seen daily media reports of price hikes in general consumer goods and energy prices. There are concerns that, combined with the Ukrainian situation, these reports are harming consumer confidence. Corporate earnings presentations have also felt the impact of the Shanghai lockdown and parts shortages. Expectations of a rapid earnings recovery due to the initially anticipated economic normalization from COVID-19 are now fading. Nevertheless, bright spots are beginning to emerge with the Shanghai lockdown expected to end and immigration restrictions on foreigners set to ease. The economy will surely rebound in reaction to the changes in behavioral limits, so we see no need to be pessimistic. It seems that the stock market is gradually regaining its composure, and both domestic and foreign investors are becoming more willing to invest in recently undervalued Japanese stocks. In addition, we think that corporate earnings are turning a corner as companies begin passing on costs.

Our investment strategy remains to invest in stocks with high growth potential and low overvaluation among those that have fallen sharply. We will also consider investing in companies that may benefit from relocating production bases, which companies are considering amid rising geopolitical risks.

Click here for Fund Holdings.

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