Currency market supports market sentiment in April


23 May 2018


In April, the performance of the Japanese domestic market was mixed following geopolitical turmoil and in anticipation of the forthcoming earnings season. The market was mainly led by index futures, with illiquid small caps being heavily sold.  

Despite the fact that the stable currency market supported market sentiment, investors pulled money out of the market. Throughout the month, the dollar appreciated against the yen, moving around the 107 level, which – in the Investment Adviser’s opinion – constituted the only support for the domestic market in April.

Investors’ reactions to the Syrian crisis was at first negative, but calmed down later in the month. Global money-flow was characterised by a cautious stance after limited military responses from the U.S., the U.K. and France respectively.

Mid-month, Prime Minister Abe’s approval rating dropped to 26.7%, depicting the first time his popularity fell below 30% since he took office in late 2012. His loss in popularity triggered investor fears regarding the potential for a sharp market correction should the government dissolve.

According to the Investment Adviser, Abe’s low popularity will make the forthcoming series of diplomatic events difficult. The combination of a strong government and Abe’s leadership was one of the reasons for the growth of the domestic economy during the last five years. In the Investment Adviser’s view, investors understand that Japan’s presence in the global economy has been supported by the Abe government, with investors now becoming increasingly concerned as to whether the Prime Minister can be re-elected as President of the LDP at the party’s convention in September, and whether the current monetary and fiscal policies will be continued.

The Investment Adviser believes, that talks between Korea and DPRK relieve the geopolitical pressure on the Korean peninsula. In this regard, the team would welcome further progress. Going forward, the Investment Adviser sees the debate around the trade deficit between the US and Japan as the next milestone. The team will continue to carefully watch the earnings reports of Japanese companies, and for now maintains the current portfolio.

Takara holdings (2531), one of the portfolio’s top performing stocks in terms of total return in April, owns Takara Shuzo, a top-ranked maker of “shochu” (distilled spirit) and “mirin” (sweet sake for seasoning), and a leading maker of “sake” and “chuhai” (a flavoured alcoholic beverage based on shochu). Overall, domestic consumption of sake and other alcoholic drinks has been declining, as a result the Company is focussing its efforts on building up a Japanese food fan base abroad to support its original business. The Company offers support to people who open restaurants abroad by introducing kitchen facility makers and even financial supporters to help establish their businesses. Currently, this business generates circa 45% of Takara Shuzo’s revenues. The Company further engages in the bio-business including gene analysis, and additionally distributes Scotch and Bourbon whiskies. The Company currently trades at PER 25x, PBR 1.9x and ROE 7.9%

The views and statements contained herein are those of Rheos Capital Works Inc in their capacity as Investment Adviser to the Fund as of 11/05/18 and are based on internal research and modelling.