Japan: Positioning in a resilient manner in turbulent times

Even though Japan is far removed from the terrible developments in Europe, the Japanese capital market is not unaffected. Since Russia's invasion of Ukraine, on 24th February 2022, both the broad TOPIX 500 and the Nikkei 225 have lost value: the TOPIX 500 has fallen by 1.5% by mid-March, the Nikkei 225 by 0.8%.

Fund Commentary
23 Mar 2022

Even though Japan is far removed from the terrible developments in Europe, the Japanese capital market is not unaffected. Since Russia’s invasion of Ukraine, on 24th February 2022, both the broad TOPIX 500 and the Nikkei 225 have lost value: the TOPIX 500 has fallen by 1.5% by mid-March, the Nikkei 225 by 0.8%.

Already in February, market sentiment in Japan was dampened against the backdrop of increasing geopolitical tensions in Europe and the announced tighter monetary policy of the US Federal Reserve. In February, the TOPIX closed the month at 1,886.9 (down 0.5% MoM) and the Nikkei 225 at 26,526.8 (down 1.8% MoM).

Inflation is also an issue in Japan, further weighing on the markets. In Japan, the Domestic Corporate Goods Price Index rose further in February to 9.3% YoY, from 8.9% YoY in January, marking the highest increase since December 1980 (+10.4%). Higher energy prices are likely to fuel inflation even further.

The core CPI may rise over 1.5% YoY in the middle of 2022. The Bank of Japan might be forced to change its monetary policy, given the weakness of the yen against the US Dollar, although they are now poised to maintain the current stance. That said, fiscal policies are reflationary around the world.

Besides the Ukraine conflict and inflation, the COVID pandemic is the third determining factor for the Japanese economy. However, the situation has eased in this respect. Since March, the COVID measures have been eased in Japan.

The Japanese market will have new winners

We expect to see a dramatic change in market leaders, movement from Growth to Value and from IT to Infrastructure. Relatively, we believe the Japanese market should enjoy the best performance among the major markets with cheap valuations and high weighting in economically sensitive value stocks.

The Nippon Growth (UCITS) Fund continues to be overweight in economically sensitive sectors with cheap valuations such as Trading Companies, Marine Transportation, Iron & Steel and Banking, while defensive sectors such as Foods, Pharmaceuticals, Retail and Utilities continue to be avoided. The Fund takes a very cautious stance towards IT-related sectors.

As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio. Please do not hesitate to contact us for further information.

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

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The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Fund as of 17/03/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.