Market Commentary and Fund Performance

Market Commentary and Fund Performance for February 2022

The Japanese stock market began the month on an upward trajectory amid robust demand for Japanese companies with favorable earnings, primarily in non-manufacturing sectors. Despite the brief spike in concerns about monetary tightening, the Japanese market benefited from the U.S.’s uptick in employment in its January statistics, outperforming market expectations. Mid-month, the U.S. Consumer Price ndex (CPI) rose by 7.5% year over year, recording its most significant rise in nearly 40 years. Simultaneously, growing geopolitical risk in Ukraine drove down share prices. As the month came to a close, share prices fell sharply due to the tense situation in Ukraine, but a subsequent rally reduced the decline from earlier in the month. As a result, the TOPIX fell slightly, by 0.39%, month over month, while the benchmark for the Fund gained 1.71% over the same period. With their abundance of domestic demand stocks, small caps held a dominant position. The Fund’s performance grew by 0.82% (HJSIX). We believe the Fund felt the impact from the sell-off of stocks that had performed well in the past month.

This month, the greatest contributor to the Fund’s performance was Internet marketing firm Septeni Holdings Co., Ltd. Its share price benefited from an upward earnings revision due to a strengthened partnership with Dentsu. Biomass power station operator and waste recycler TRE Holdings Corporation also contributed. Its performance remained robust, and its share price rebounded from last month’s fall despite no specific news. PC and smartphone accessory vendor Elecom Co., Ltd. saw its share price climb on the back of its sale of an unprofitable business and announcement of a massive share buy-back.

Meanwhile, the stock that had the most significant negative impact on the Fund’s performance was HITO-Communications Holdings, Inc.; its earnings are robust, but its share price dropped due to selling pressures and concerns about the negative impact of new COVID-19 waves on tourism and other sectors. Employee benefits outsourcing contractor Benefit One Inc., which continued its share price decline from the previous month. While the firm is performing well, it continues to suffer from the ongoing sharp drop in share prices for stocks that have made significant gains recently. Used condominium trader Star Mica Holdings Co., Ltd. also posted solid earnings, but its share price fell likely due to concerns about the adverse impact of rising interest rates.

Click here for full, standardized Fund Performance.

Outlook for March 2022

The Russian invasion of Ukraine and the accompanying spikes in crude oil, natural gas, and product prices have thrown cold water on an economy expecting recovery from COVID-19. We expect the uncertainty to continue in the short term. However, putting aside energy prices, we believe there is no need for excessive pessimism. Our belief stems from the relatively minor impact of uncertainty on Japan, the relative stability of the domestic demand-dominated small caps, the level of undervalued stocks in the Japanese market, and the quick recovery from conflicts the stock market has made in the past. Because we expect the flight to safe assets to continue, our investment strategy will be to consider reducing the weight in stocks that have made past gains due to the need to be wary of selling pressures. On the other hand, among stocks that have fallen sharply or are languishing at undervalued prices, we will continue to invest in those we expect to grow as the economy normalizes and structural changes occur.

Click here for Fund Holdings.