The Strategic Japan Opportunities Fund NAV declined by 14% in December, the largest monthly loss since the Fund launched in March 2017. The Japanese market sunk following the news that Meng Wanzhou, CFO of Huawei, was arrested in Canada at the request of the US.
The UK Prime Minister survived the vote of no confidence, but investors did not react to this. During the month, investors increased their defensive stance selling illiquid small cap stocks which had added alpha to their portfolio’s, but more recently those quality small cap stocks declined significantly. The Global market continued to deteriorate under Trump’s shutdown and his uneasy comments regarding Mnuchin and the FRB. The unsuccessful listing of Softbank at the Tokyo Stock Exchange dampened the interest of individual domestic investors as they shied away from the market. Sizeable redemptions inevitably forced fund managers to sell their core stocks, creating a further drag on the market. Foreign investors sold out of Japanese cash and future markets during December, resulting in total outflows of approximately $110 billion in 2018, which was the largest net redemption from these markets in the last decade. The major buyers were the Bank of Japan and domestic corporations, whilst individuals were net sellers.
Don Quijote Holdings (7532), which operates discount stores selling consumer electronics, daily necessities, groceries, watches, sporting goods and many other items enjoyed by international tourists, purchased a 40% stake of Familymart Uny holdings (8028) which has 200 Uny stores. With the additional 60% that Don Quijote purchased in October, Don Quijote will utilize the 200 Uny outlets as new shops when the transition is complete. Familymart Uny in turn, has purchased 20% of Don Quijote as a result of the recent cross-shareholdings between Don Quijote and Famliymart Uny. Don Quijote has also announced that they will change the company name to Pan Pacific International Holdings to increase familiarity with international customers and investors. Don Quijote was founded by Mr. Yasuda, aged 69, who owns 23% of the company. Mr. Yasuda stepped down as Chairman and CEO in 2015, and was likely looking for a partnership with a well financed and relatively large organisation such as Familymart Uny and eventually, Itochu Corporation (8001) that owns 41% of Familymart Uny. The Investment Adviser believes that Don Quijote’s unique retail business model can expand faster now, by using Familymart Uny’s asset’s and the financial power of the Itochu Corporation. P/E 25x, PBR 3.4x, ROE 14.2%.
The Investment Adviser has experienced different degrees of market decline in various Japanese portfolios over the years, the largest of which occurred during the Lehman Shock in 2008. It is important to note that the quality companies whose share price “bombed” the most, also, in the Investment Adviser’s experience recovered the most, as market conditions returned to normal. The Team will remain fully invested, regardless of the external environment and will continue to remove “slumped” companies from the portfolio, and retain exposure to companies they consider to be high quality. The Team has great confidence in the Fund’s current portfolio, and believe in maintaining the existing positions, even during difficult market conditions. The US and China trade talks which took place in early January, and robust US December Non-Farm Payroll numbers should support the global market for a while. There will be a new Japanese Era Name in April, prior to the Emperor enthronement ceremony which will commence in May.
In June, Japan will host the G20 summit in Osaka. Prime Minister Abe’s Government remains stable and the next important milestone for him and the LDP will be the election of the House of Councillors in July. The Team believe that the Prime Minister is capable of managing these events without incident and investors will view this positively. Key factors for the domestic economy continue to be the negative sentiment of corporate executives from last year and individual consumers who will face consumption tax hikes next October. The Investment Adviser continues to watch both trends carefully and will construct the portfolio to benefit from a possible turn around in the economy in the near future.
The views and statements contained herein are those of Rheos Capital Works Inc in their capacity as Investment Adviser to the Fund as of 12/01/19 and are based on internal research and modelling.