Prime Minister Abe’s snap election held in October paid off for the ruling LDP and the Komei party, which were able to maintain their seats. Both parties continue to dominate 2/3 of the House of Representatives, with PM Abe and the coalition government being able to strengthen their current position for at least another four years. The newly formed party under Ms. Koike gained 49 seats out of a total of 465 seats.
During the month, the market rose on expectations regarding a strong and stable government. The increase was mainly led by large caps, with small companies having stayed relatively quiet during the period. The market is expecting a fiscal stimulus package later this year as part of a supplementary budget. The Investment Adviser anticipates this to support both, the market and domestic economy.
The markets are further expecting the reappointment of Mr. Kuroda as governor of the Bank of Japan, whose term in office will end in April 2018. The Investment Adviser believes that the government will maintain its current Japanese economic framework, implemented when PM Abe took office five years ago. PM Abe and his cabinet are always trying to achieve robust and constant growth for the Japanese economy.
The Investment Adviser will continue to focus on companies that can generate profits regardless of the external environment. Moreover, the team targets companies which are improving their productivity and seeking to increase employee salaries and bonuses, in order to boost domestic consumption, in an attempt to offset a possible tax hike in 2019.
Kyudenko (1959), one of the best performing stocks in the portfolio in October, manufactures power transmission and transformation facilities. The Company also provides indoor electrical wiring, water treatment, air-conditioning, and piping works. The Company’s president is currently looking to raise the Company’s ROE by increasing top and bottom lines in order to become a top performing Company in the Kyushu area (the most southern part of Japan). Kyudenko recently hired 200 new graduates with the objective of increasing the number of construction site managers, currently there are between 2,700 and 2,900. As a result, Kyudenko aims to push current sales of Y370 billion to Y400 billion by the year 2020. The Company has managed Kyudenko Academy since 2012 to educate freshman to be able to join the business as quickly as possible. The Company trades at a P/E of 15.4x, a PBR of 2.5x and a ROE of 17.4%.
The views and statements contained herein are those of Rheos Capital Works Inc in their capacity as Investment Adviser to the Fund as of 12/09/17 and are based on internal research and modelling.