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.

May 2023
  • Tadahiro Fujimura
    Tadahiro Fujimura, CFA, CMA
    Portfolio Manager

Market Commentary and Fund Performance for April 2023

The Japanese stock market started the month on a downswing due to a series of weak U.S. economic indicators (the ADP employment report and Non-Manufacturing ISM Report on Business), fueling concerns of an economic recession. However, from mid-month, the market turned around due to Bank of Japan (BOJ) Governor Ueda’s comments supporting maintaining monetary easing and speculation over prominent U.S. investors making additional investments in Japanese equities. Near month-end, the market wobbled due to caution over the outflow of large deposits from U.S. regional banks, but the BOJ’s decision to maintain monetary easing provided relief to the stock market, allowing it to end the month above where it began. As a result, the Tokyo Stock Price Index rose 0.38% month over month, while the benchmark for the Fund, the Russell/Nomura Small CapTM Index, rose 0.65% over the same period. The Fund’s performance this month decreased by 0.86% (HJSIX), underperforming its benchmark.

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

This month, the primary positive contributors to the Fund’s performance were an amusement facility operator, AEON Fantasy Co., Ltd., a consulting for domestic and international construction and civil engineering projects company, Nippon Koei Co., Ltd., and a residential propane and industrial gas sales company, Iwatani Corporation. AEON Fantasy rose because it beat its forecasts and expects to post a significant increase in profit this fiscal year. Nippon Koei rose due to a rebound from its declining share price through last month, as well as having been bolstered by expectations for post-COVID construction progress. Iwatani Corporation’s share price rose because of the expectations for benefits from the government’s announced hydrogen strategy.

Conversely, the stocks with the most significant negative impact on the Fund’s performance were an internet advertising agency and consultancy company, ValueCommerce Co., Ltd., a diversified waste recycling and biomass power generation operations company, TRE Holdings Corporation, and a manufacture and sales of coil winding machines for coil production company, Nittoku Co., Ltd. ValueCommerce’s share price declined due to the announcement of a downward revision to full-year earnings during its Q1 earnings presentation. There was no specific news regarding Nittoku, however, its decline was likely caused by a rebound from its rising share price through last month or concerns about slowing investment. This month, we made new investments in a Consumer Staples company and a Consumer Discretionary company.

Outlook for May 2023

Alongside concerns about economic trends in Europe and the U.S., there are ongoing issues with small- and mid-cap banking stocks in the U.S. besides last month’s headlines in Silicon Valley Bank and Credit Suisse. Their impact on the global financial system is still uncertain. Conversely, we do not see cause for pessimism about the Japanese economy, as we believe that there is little concern about domestic financial institutions, with their continuous capital surplus, and several other factors are improving, including the return of foreign tourists, normalization after COVID-19, and production recovery due to the end of parts shortages. Corporate earnings are also improving, mainly in the non-manufacturing and domestic demand sectors, and we think that their profits would continue to grow in this fiscal year. Continued share buybacks and purchases by individual investors would also underpin the stock market in the current fiscal year. We have not made any significant changes to our investment strategy. We intend to expand investments in stocks that have the potential for profit growth, especially in the domestic demand sector, and those that are highly undervalued vis-à-vis their price to book (P/B) ratios. We will also uncover new stocks by focusing on production recovery and undervalued stocks, especially in the highly undervalued foreign demand sector.

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