The domestic market moved without clear direction in July with large caps rising, while small caps declined sharply during the month. Early in the month, torrential rains and large-scale floods swept through western Japan, negatively impacting the region’s consumption.
Major logistic centres, which are connected to various manufacturing factories in the Hiroshima and Okayama region, could not recommence work for some time.
Overall, the continuing trade war between the US and China combined with a possible deterioration of domestic consumption in Japan capped the market. A potential weakening of the European economy further led to declining investor sentiment.
In July, the US dollar appreciated sharply following the release of strong US labour market data. The weak Yen led investors to buy back shares of domestic exporters, pushing the Nikkei and Topix higher.
According to the team, the market may continue hovering around current levels through the summer vacation period. Corporate earnings for the first quarter (April to June) have been mixed, with earnings of companies related to the manufacturing of semiconductors mostly in line with market expectations. At the moment, global demand for semiconductors is subdued, leading SME companies to struggle. The Investment Adviser expects demand to recover to some extent towards year-end and continues to follow the trend carefully.
Due to the nationwide unstable weather conditions during summer, domestic consumption has suffered. Going forward, hot temperatures may further negatively impact consumption in August.
The team will continue to target companies that can generate superb earnings growth in any macro environment, selecting companies whose bottom line growth can generate value for investors.
Ukai (7621), which has been part of the portfolio since December 2017, operates luxurious Japanese and Western restaurants in Tokyo and Kanagawa. The Company was founded by Mr. Sadao Ukai in suburban Tokyo in 1964 and taken over by Mr. Daikuhara after his death in 2009. Mr. Daikuhara initially joined the Company as a chef and is trying hard to maintain the “Ukai style”. President Donald Trump dined at one of the restaurants during his visit to Japan last year, triggering a surge in the Company’s share price.
In April this year, Ukai opened one of the prestigious Teppanyaki restaurants in one of the most competitive restaurant areas in Tokyo (Roppongi), with average prices for a dinner superseding $500 per person. According to the Investment Adviser, there aren’t many other restaurants in Japan that can offer such high quality food and service. The Company currently trades at P/E 105x, PBR 4.5x and ROE 4.4%.
The views and statements contained herein are those of Rheos Capital Works Inc in their capacity as Investment Adviser to the Fund as of 17/08/18 and are based on internal research and modelling.
For detailed performance information based on complete 12-month periods since inception, please refer to the Fund’s factsheet, which is obtainable from https://eisturdza.com/funds/fund-documents.