Market Outlook: The Japanese market continued to recover during May 2020 even though the impact of COVID-19 remains. While the state of emergency was lifted throughout most of Japan on 14 May, it was maintained until 25 May for Tokyo and its neighbouring prefectures.
Some small retailers have been forced to close, but large retailers have managed to survive. Many companies have postponed the announcement of their results for FY2019 which ended March 2020, and were also unable to provide earnings estimates for the new fiscal year. Although there are many uncertainties surrounding corporate earning projections and the potential for a severe business environment in the near future, investors are beginning to invest again.
The Bank of Japan held an emergency meeting and announced the introduction of additional financial support, mainly for small to mid-size companies. Robust financial and fiscal support, which began in April, has partially supported such companies.
The domestic market may continue to rise as the market seems to be ignoring the possibility of further earnings deterioration due to COVID-19 later in the year. The corporate earnings for Q2 could be worse during this fiscal year with the potential to recover towards the end of the period.
The substantial financial and fiscal stimulus packages have certainly supported the domestic economy and the strong US dollar, which maintained 107 yen, has also supported Japanese exporters or cyclical stocks.
The US-China dispute has accelerated the disconnection of current supply chains for the global electronics and auto industries. Japanese electronic and component manufacturers will now require two supply chains to meet the demands in both the US and China.
Companies with warehouses around the world may be able to supply parts in a timely manner. The Investment Team believes Daifuku’s (6383) warehouse management system has the potential to grow going forward.
On 25 May, the Japanese Government finally eased the state of emergency for all prefectures including Tokyo and Hokkaido. Life will return to normal gradually, but new life-style practices such as physical-distancing and working from home are continuing globally.
The Team also believe electronic gadgets and fast telecommunication companies that support this new way of life will grow within Japan and other countries. Therefore, the Team are concentrating on companies related to the above. The Investment Adviser will maintain the current portfolio.
Nichicon (6996) is engaged in the manufacture and sale of various capacitors including aluminium and tantalum electrolytic capacitors and plastic film capacitors for electronics. The company’s products are used for electric apparatuses, power utilities, function modules, positive thermistors and switching power supplies.
The Company announced weak earnings for FY2019, but has increased its dividend for the eighth consecutive year. Investors welcomed the strong earnings trend and firm dividend payment, and the share price rose strongly during the month. Current stats: P/E 19x, PBR 0.7x, ROE 3.6%.
The views and statements contained herein are those of Rheos Capital Works Inc in their capacity as Investment Adviser to the Fund as of 03/06/2020 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.