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 2021
  • Tadahiro Fujimura
    Tadahiro Fujimura, CFA, CMA
    Portfolio Manager

In April, the stock market fell after its sharp rally in March. While fundamentals are improving, as evident in the positive overseas economic indicators and upward revisions to corporate performance, share prices are under pressure from profit taking because they look overvalued. Amid these circumstances, COVID-19 is spreading again in Japan, and the government has declared a new state of emergency,fueling market pessimism. The decline in automobile production caused by the semiconductor shortage was also a concern. As a result, the Tokyo Stock Price Index (TOPIX) declined by 1.43% month-over-month. In comparison, the Russell/Nomura Small Cap Index fell by 1.33% over the same period. The Fund (HJSIX) underperformed and declined by 2.45%.

One of the most significant contributors to the Fund’s performance this month was Creek & River Co., an organization for creators and other experts that provides outsourcing services, posted double-digit profit growth this fiscal year and the last. It also announced a share buyback, which appears to have been well-received. Italian restaurant chain operator Saizeriya Co., Ltd. continues to improve its overseas restaurants and cut costs more than expected. As a result, it reduced its losses despite the harsh business environment, which appears to have fueled its share price growth.

Meanwhile, the stock with the greatest negative impact on the Fund’s performance was Nishimoto Co., Ltd., a trading firm specializing in Asian foods for Western markets. While the coming end of the COVID-19 pandemic in the West should provide a boost, the company’s share price appears to have dropped in response to its rise in March. Concerns about another wave of infections also played a role. A financial services provider across Japan and Asia, AEON Financial Service Co., Ltd., saw its share price fall due to a bearish response to its announced profit forecasts for this fiscal year. They will remain low due to increased costs in the insurance business and systems investments. 

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Outlook for May 2021

The short-term economic outlook for Japan is likely to be worse than that of other countries in the coming months. This prediction is due to the vaccination delays and the new wave of infections from mutant strains, which have kept the economy from normalizing. 

On the other hand, we believe the Japanese stock market has already factored in this delay in economic recovery. It has also performed worse than many other countries. Therefore, even if the pandemic is prolonged, we think that the risk of a stock market decline is not significant. 

We also believe that the relative undervaluation of Japanese stocks should underpin the market. Nevertheless, there continues to be a large disparity in stock valuations among companies. We think it is necessary to closely follow earnings growth rates compared to last year and assess whether better-than-expected performance can be achieved.

In light of the above, our investment strategy is to selectively invest in attractive, undervalued equities expected to recover significantly from the adverse effects of COVID-19 and continue growing in the future. We also believe that, as the economy normalizes, more companies will aggressively implement share buybacks, mergers and acquisitions, and capital investments. Therefore, we will also focus on stocks that promise long-term growth in earnings per share.

Click here for Fund Holdings.

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Tom White is a TD Ameritrade Network contributor and is not affiliated with the Hennessy Funds. Content is not investment advice, or a recommendation of any security, strategy, or account type. Options involve risks and are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses.(Media - TD Ameritrade-Rothberg)

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