Japanese market on the rise


Fund Commentary
27 Jul 2017


In June, the Japanese market rose again supported by investors’ strong expectations of bottom-line growth of Japanese companies. During the month, a solid dollar/yen rate supported the overall market and especially low valuation stocks performed. The dollar/yen rate weakened after the FRB’s announcement of a 25bp rise of its FF rate in the middle of the month. It however quickly came back to the 110 yen level.

Due to a series of LDP members’ scandals, investors were increasingly anxious about domestic political instability. Investors are waiting for better than expected corporate earnings for the first three months of this fiscal year. As a result the market may fluctuate if Q1 earnings miss market expectations.

Outsourcing (2427) has been providing staffing and production outsourcing for manufacturers for many years. The operating environment in which manufacturers find themselves in today has become tough, as such the company is focussing on entities which are less susceptible to economic trends, such as HR services for U.S. military bases, as well as convenience stores. The newly amended Act makes dispatched workers a more attractive employment option for manufacturers, placing greater onus on the administration of such workers, which dispatch business operators will have to undertake. This will in turn require companies to put more emphasis on career development for contracted workers. In the meantime, Outsourcing has expanded its offshore business through an active M&A programs, while gaining a firmer foothold in the businesses it launched in Europe and South America. As of 30th June, the Company traded at a P/E of 78.2x and a PBR of 5.5x.

The LDP lost major seats at the Tokyo Metropolitan Assembly election, which was held on 2nd July. There have been several minor scandals of members of the LDP recently, causing lower popularity of the Abe government. The Investment Adviser thinks that it is too early to say that the result of the latest local election may cause weak support of the Abe government. However, he advises not to underestimate the impact of 13 million people changing their minds and to carefully watch how Prime Minister Abe will reform his current cabinet in preparation to run for the next Presidential elections of the LDP and the House of Representatives election. The elections are scheduled to be held in July and December 2018 respectively. Prior to those events, Mr. Kuroda, the Governor of the Bank of Japan, will end his role in April 2018, the impacts of which the Portfolio Manager advises to carefully watch as well. The market may stagnate if the Abe cabinet struggles to trigger current fiscal and monetary policies, which have supported the domestic economy over the past 5 years. The Investment Adviser will maintain the current portfolio positioning and watch the political situation carefully.

The views and statements contained herein are those of Rheos Capital Works Inc in their capacity as Investment Adviser to the Fund as of 12/07/17 and are based on internal research and modelling.