First the price actions, then the fundamentals

Market Development: In early June, the Japanese market gained and the Nikkei 225 recovered to above 28,000 at one point on the back of a weakening JPY. However, concerns arose surrounding the ECB’s monetary tightening and the market quickly reversed.

Fund Commentary
15 Jul 2022

Market Development: In early June, the Japanese market gained and the Nikkei 225 recovered to above 28,000 at one point on the back of a weakening JPY. However, concerns arose surrounding the ECB’s monetary tightening and the market quickly reversed.

In mid-June, stocks declined substantially as the market became anxious over a global economic slowdown given high inflation and monetary tightening moves by major banks. An announcement by the Bank of Japan (BoJ) that it intends to maintain its easing measures, supported the Japanese market.

In late June, Japanese equities rebounded due to further depreciation of the JPY and on expectations of an economic reopening given falling COVID cases.

The TOPIX closed the month at 1,870.8 (down 2.2% MoM) and the Nikkei 225 at 26,393.0 (down 3.3% MoM). 18 out of the 33 sectors declined. The top five performers were Utilities, Fishery, Textiles, Foods and Construction. Names related to inbound travel were also bought as immigration measures were relaxed during the month. The bottom five performers were Marine Transportation, Mining, Steel, Electrical Equipment and Precision Instruments.

The 10-year JGB yield started the month at 0.24 and at one point hit over 0.3, when the US 10 Yr Treasury surged close to 3.5. However, as the BoJ announced they would maintain their monetary easing stance, the yield declined, ending the month at 0.23. The JPY against the US dollar started at 128.7 and surged to 137.0 for the first time in 24 years, as the yield spread between the US and Japan rates widened, ending the month at 135.7. The crude oil price started at 114.67 and steadily increased, but from mid-June, when global economic downturn became a concern, the price reversed and ended the month at 105.76.


The Zero-corona policy being adopted in China, coupled with the lockdowns in Shanghai had a large impact on the global and Japanese economies. Real GDP growth from April to June 2022 in China is expected to slow to 2% YoY, following a moderate growth of 4.8% YoY between January and March. However, the lockdowns in Shanghai started to ease during June and, on 31st May, the Chinese government announced a large economic stimulus package, including infrastructure investment and a 50% tax cut for car purchases. The economist at Daiwa expects that Chinese GDP will grow 5.1% YoY in July-September and increase further to 5.8% in October-December.

In Japan, industrial production in May declined 7.2% MoM, significantly lower than the market forecast of -0.3% MoM. By sector, the main deteriorations were to Motor Vehicles, Electrical Machinery, Information Equipment and Machinery. These declines likely reflect the strong impact from China’s zero-corona policy and lockdowns in Shanghai. The Japanese government estimate that industrial production in June would increase sharply by 12.0% MoM and rise by a further 2.5% MoM in July. On the contrary, retail sales in May increased 0.6% MoM, the third consecutive monthly rise. In particular, department store sales rose sharply, with +55.3% YoY and +9.6% MoM.

According to BoJ’s quarterly economic survey “Tankan”, the business conditions DI for large manufacturers in June was at +9, down 5 points from the March survey. In contrast, the business conditions DI for large non-manufacturers recorded at +13, improving 4 points from the March survey. The outlook DI (three-month forward) for large manufacturers improved slightly, by 1 point. On the bright side of the survey, the FY2022 capex for large companies (all industries) is expected to rise by 18.6% YoY. This marks a strong upward revision from the March survey of +2.2% YoY, the highest June level since records began in 1983. We think this likely reflects the economic reopening expectations, ongoing labour shortage and, more notably, the recent weakness of the JPY against the USD, which should encourage Japanese companies to return production facilities back to Japan. In addition, foreign companies may be tempted to establish their facilities in “low-cost” Japan.

In the first half of 2022, High-Tech sectors recorded the worst performance. Electricals declined 21.7% against the TOPIX at -6.1% with precision instruments down 17.5% while in the US, the Semiconductor’s SOX index declined 35.2% during the same period.

On the fundamentals front, bad news regarding the Semiconductor sector has just started to be reported, as on 30th June Micron Technology (in the US) announced that net sales from June to August would decline to $7.2 billion, much lower than market consensus of $9.1 billion. A series of negative news on the IT and High-Tech sectors may follow.

Portfolio Development

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese Yen basis as of 30th June 2022 went down 3.2% compared with that of 31st May, whilst the TOPIX TR index declined 2.1% during the same period. The Fund put one new name (Isetan Mitsukoshi Holdings) into the portfolio with no stock sold out.

The Fund continues to be overweight in economically sensitive sectors with cheap valuations such as Trading Companies, Marine Transportation, Iron & Steel and Banking, while defensive sectors such as Foods, Pharmaceuticals, Retail and Utilities continue to be avoided. The Fund takes a very cautious stance towards IT related sectors.

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.

Adam TurbervilleAdam Turberville
+44 1481 742380


The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Fund as of 08/07/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.