Japanese market declines in light of geopolitical tensions


Fund Commentary
23 Oct 2017


​At the beginning of September, the Japanese market declined due to threats associated with North Korea and the uncertainty surrounding the diplomatic solution of the geopolitical tensions.

Investors generally took a “wait and see” stance in light of the North Korea issue and the scheduled Federal Open Market Committee (FOMC) and BoJ meetings. The FOMC projected a potential rate hike this year.

In September, the dollar appreciated against the yen, pushing the domestic market up towards the end of the month. The FRB and BoJ did not change their current monetary policies, thereby neither indicating positive nor negative signals to investors.

Prime Minister Abe recently called a snap election, which will be held on 22nd October. He stated that the government will re-consider raising the current consumption tax to 10% in October 2019. The current government had thus far postponed the scheduled 2% tax hike twice.

Ms. Koike, a former member of the House of Representatives and current Governor of the Tokyo Metropolitan government formed a new party called “Kibo-no-to” (Party of Hope) to challenge PM Abe. So far it is too early to say, but the LDP and Komei Party that currently form the coalition government may still maintain the majority of seats at the House of Representatives after the election. The Investment Adviser believes that the market could continue to grow steadily unless both parties lose major seats. Based on this assumption, the team maintains the current portfolio.

After its IPO in June this year, the Investment Adviser added Tsunagu Solutions (6551) to the portfolio. The Company provides professional recruitment support services such as corporate event out-sourcing, job lead media operations, recruitment, and training for franchisee employees. Overall, the Company benefits from the evolving and severe labour shortages in Japan as well as clients such as convenience store operators, recruiting part-time employees for a total of 55,000 stores across Japan. Despite the fact that the Japanese population is decreasing, the number of chain stores in Japan currently grows by 2% annually. The Company not only receives business from convenience store operators but also from companies that operate outlet malls in suburban areas. Tsunagu Solutions is aiming to achieve a 25% – 30% growth in operating profit over the next few years based on the continued labour shortages in Japan. The Company currently trades at a P/E of 94x, a PBR of 11x, and a ROE of 29x.

The views and statements contained herein are those of Rheos Capital Works Inc in their capacity as Investment Adviser to the Fund as of 13/10/17 and are based on internal research and modelling.