Preview of 2021

Market Development: Recently, the Japanese markets have been well supported by broad investors, but this eventually declined in January. A weak trend in overseas markets weighed heavily on domestic investors at the end of the month, but the strong US dollar against the JPY bolstered some support for Japanese exporters, such as the Electric Appliances and Machinery sectors.

Monthly Fund Commentary
16 Feb 2021

Market Development: Recently, the Japanese markets have been well supported by broad investors, but this eventually declined in January. A weak trend in overseas markets weighed heavily on domestic investors at the end of the month, but the strong US dollar against the JPY bolstered some support for Japanese exporters, such as the Electric Appliances and Machinery sectors.

During the month, Oil & Coal, Rubber Products and Mining were the top-performing sectors in the Topix index. Precision Instruments, Marine Transport and Iron & Steel were the bottom performing sectors.

Prime Minister Suga declared a State of Emergency for major cities on 7th January in order to prevent a further increase of COVID-19 patients, although people are not strictly ruled by this order. Even though the number of patients has declined gradually, the popularity of PM Suga has also declined.

Market Outlook

The domestic market faces weak consumption due to the semi-lockdown manoeuvre which was initiated on 7th January to combat the increase of COVID-19 patients. In addition to this, people feel it was announced too late, resulting in an increase of anxious feelings towards PM Suga’s Cabinet amongst Japan’s citizens.

According to NHK’s latest survey (Japan’s national TV station), the approval rating of Suga’s Cabinet declined from 62 in September 2020, to 40 currently. Additionally, the disapproval rate has risen to 41 from 13 in the same period. We have a national election scheduled for September this year, and the Olympic Games may or may not be held prior to the election. This means that PM Suga’s guidance of the nation over the next several months could be a very difficult and bumpy road.

It remains uncertain when and how vaccine injections will become available for Japanese citizens. Mr Kono, the Minister of State for Special Missions, appointed by PM Suga to oversee the Japanese administration of the COVID-19 vaccine, said that vaccinations would begin sometime in February 2021. Nationwide vaccination may take more than 10 months to complete. That said, the situation may be better than the current domestic COVID-19 environment within the next year. We will continue to maintain the current portfolio for the time being.

Portfolio Development

TIS (3626) provides network solutions and system integration services. The company is involved in outsourcing business and cloud services related to information technology, software development, solution business and real estate leasing and management. TIS’s largest revenue source is background systems for a credit card settlement system which generates the greatest profit margin for the company. On the other hand, on-site IT support and solution services for banks have shrunk over the past several months due to COVID-19.

TIS targets to raise its gross profit margin, which is currently 23.1%, to 25% within the next few years. The profit margin was 10% in 2009, confirming that the rationalisation of the company has certainly progressed over the last decade. TIS entered a capital and business alliance with Credify Pte in Singapore in December 2020 in order to enhance digital ID services for banks and insurance companies in Singapore. TIS will receive know-how of digital ID solution systems that can enrich current Japanese administrative services at local government bodies.

As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio.

Please do not hesitate to contact us for further information or visit the Fund Page >

Adam TurbervilleAdam Turberville
Director
+44 1481 742380
a.turberville@ericsturdza.com

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The views and statements contained herein are those of Rheos Capital Works Inc in their capacity as Investment Adviser to the Fund as of 10/02/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.