Goldilocks market environment in Japan


Fund Commentary
22 Dec 2017


Overall, the Japanese market rose again in November, backed up by strong corporate earnings. Small-caps caught up with large caps, which had rallied during the previous months.

The dollar depreciated against the yen (from initially 114 to 111 yen per dollar intra-month), which however did not impede neither exporters nor the overall market. The Democratic Peoples Republic of Korea (DPRK) launched another missile in late November, an event that was largely disregarded by the market.

The recent domestic market is described as a “Goldilocks” market environment. The market is currently supported by strong corporate earnings and expectations about future earnings growth in Japan. Labour shortages have been an issue in the country and the Japanese people have so far perceived it as a bottle neck for economic growth. However, people have started to see this as an opportunity to develop in order to suit the future needs of the Japanese economy rather than as an issue that caps the country’s future growth. The Japanese people believe that productivity can increase further to cope with the labour shortages and increasingly aging society of Japan.

The Investment Adviser thinks that wage increases will be one of the important growth drivers in 2018 and beyond and will help Japan escape the deflationary environment completely. The Investment Adviser will maintain the current portfolio.

Maruwa Unyu Kikan (9090) has been one of the Fund’s top-performing stocks in November. The Company engages in third-party logistic businesses in Japan and has received large orders from Amazon in 2016 after Yamato Transport (which used to have the largest share in Amazon’s delivery business) gave up business with Amazon because of rapidly increasing courier salaries. Maruwa’s unique selling point is that the Company does not collect parcels but only delivers them. Amazon has agreed to install 200 warehouses for Maruwa at their own cost in Tokyo’s urban area in order to improve Amazon’s productivity. Maruwa plans to recruit 10,000 drivers nationwide in order to be able to receive large orders from Amazon. The average age of Maruwa’s drivers is 37 compared to the average age of 48 in the industry. The Company currently trades at a P/E 38.4x, a PBR of 5.8x and a ROE of 16.2%.

The views and statements contained herein are those of Rheos Capital Works Inc in their capacity as Investment Adviser to the Fund as of 18/12/17 and are based on internal research and modelling.