Japan bolstered by tech demand

Market Development: In December, investors heavily sold off Japanese small caps that were likely to be affected by the approaching US rate hike. Small stocks, especially those with high valuations, saw heavy profit-taking, whilst large caps with relatively low valuations were buoyed by investors wanting to lower the risk of their equity portfolios.

Fund Commentary
12 Jan 2022

Market Development: In December, investors heavily sold off Japanese small caps that were likely to be affected by the approaching US rate hike. Small stocks, especially those with high valuations, saw heavy profit-taking, whilst large caps with relatively low valuations were buoyed by investors wanting to lower the risk of their equity portfolios.

The market seems to have started discounting the weak earnings projections of the next fiscal year under the pressure of rising input prices, such as oil and raw materials, brought on by the spread of the Omicron variant. The unsolved supply chain issues of global logistics is an additional burden on Japanese companies.

The tightening of US monetary policy is one reason for investor hesitation, another is the high degree of government ownership of Japanese companies. Even under these gloomy market conditions, semiconductor and Electric Vehicle related companies have shown strong earnings trends and positive share price movements in recent months.

Market Outlook

We are maintaining a cautious stance on the market due to the possible tightening of monetary policy and expectations of a tax hike from Kishida’s cabinet. The US Fed should accelerate tapering early this year and rates could soon rise, should inflation continue to increase.

Semiconductors and semiconductor manufacturing equipment producers look like safe haven areas, so we will continue to maintain a relatively high exposure to these sectors in the portfolio. In addition to the Semiconductor Sector, we believe that Battery Electric Vehicles (BEVs) and new fuels will arise on the back of strong consumer demand, not only for vehicles but also to replace fossil fuel markets.

President Toyoda of Toyota Motors announced that they are going to accelerate R&D into BEV. Toyoda previously said that they were producers of Plug-in Hybrid Electric Vehicles (PHEVs) and Hydrogen Vehicles rather than BEVs – until recently. President Toyoda’s announcement surprised the market. His target that Toyota Motors will produce 30 new BEVs by the year 2030 is very ambitious for the market.

For the time being, small caps may see further selling off pressure due to their high valuations compared to low growth value stocks. We need some time for the market reaction towards the actions and announcements of the Fed to settle. We will continue to seek Japanese growth companies to build the portfolio.

Portfolio Development

Kuroda Precision Industries (7726) manufactures pneumatic precision equipment and electronic devices, machine tools and screws. According to the company’s Q2 results, demand from the semiconductor manufacturing and measurement equipment industries is strong with a positive outlook regarding consistent orders going forward.

The company plans to invest more CapEx in its own Digital Transformation (DX) in order to increase its productivity and maintain high-quality control levels to meet customer needs. Kuroda plans to push its top line to JPY 23 bn (currently JPY 16.8 bn) by 2025 and aims to reach JPY 2 bn Operating Profit (currently JPY 700 mn) in the same timeframe.

As always, we invite investors, or prospective investors in the Strategic Japan Opportunities Fund to discuss the opportunities with the investment team if they would like to understand our views on the current situation and the positions held in the portfolio. Please do not hesitate to contact Adam or visit the Fund Page >

Adam TurbervilleAdam Turberville
Director
+44 1481 742380
a.turberville@ericsturdza.com

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The views and statements contained herein are those of Rheos Capital Works Inc in their capacity as Investment Adviser to the Fund as of 11/01/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.