Rediscovering Japanese stalwarts

Market Development: The Tokyo markets dropped off sharply in January, mainly due to a variety of uncertainties, such as the increasing number of Omicron patients globally; rising oil prices; inflation pressures in the US; rising geopolitical risk in the Gulf area, triggered by Yemen’s Houthis attack on the UAE; and the unstable relationship between the US and Russia regarding Ukraine.

Fund Commentary
9 Feb 2022

Market Development: The Tokyo markets dropped off sharply in January, mainly due to a variety of uncertainties, such as the increasing number of Omicron patients globally; rising oil prices; inflation pressures in the US; rising geopolitical risk in the Gulf area, triggered by Yemen’s Houthis attack on the UAE; and the unstable relationship between the US and Russia regarding Ukraine.

The VIX Index rose sharply causing investors to distance themselves from the equity market, particularly small companies whose valuations are relatively high compared to conventional, old-fashioned Japanese companies.

We maintained a cautious stance on the market, but the stocks we held in the portfolio declined and dragged on the NAV during the month. JTOWER and GMO Financial Gate, the latter a strong performer last year, declined more than 45% in January, whilst Takeuchi Manufacturing and Asahi Printing rose slightly over the same period. The market continues to prefer low valuations rather than growth-oriented, high valuation stocks.

Market Outlook

In January, the FOMC ended in line with market expectations and the next meeting will be held in March. The Fed stated that they may increase rates in March to combat inflation in the US. The direction of the US monetary policy should be consistent for the time being, so we believe the market has already discounted this fact.

Whilst inflation pressure keeps a cap on global growth, the uncertainty of the situation in Ukraine and the Gulf regions are a stubborn headache for investors. We are of the opinion that the market has also discounted some of the uncertainty through sharp price deterioration between December 2021 and January 2022.

We retain our exposure to semiconductor manufacturing related companies and post-COVID companies such as Taiyo Holdings, Japan Materials, and Oriental Land.

Oriental Land, which has operated Tokyo Disneyland since 1983, raised ticket prices by around 8% in October 2021. With the spread of the Omicron variant since last November, the number of guests has declined, but it is gradually recovering.

The first one-day passport price of Disneyland in 1983 was JPY3,900, now 38 years later, it costs JPY9,400. In other words, Oriental Land has raised its price by 2.34% every year for the last 38 years which is a very decent price rise, especially in Japan.

An unlisted snack company has recently raised its long-selling flagship snack price which was JPY10 per bar to JPY12, due to the increase in raw material costs. The company has maintained the JPY10 price for the last 42 years through internal cost reduction efforts. The 20% price rise over 42 years means a 0.4% raise every year. Oriental Land raised ticket prices 14 times in 38 years, but the snack company only once in 42 years.

Considering this, we must find companies that can raise selling prices constantly, while building and maintaining customer loyalty. We will maintain the current portfolio.

Portfolio Development

Taiyo Holdings (4626) manufacture and sell chemical products for electronic components and industries’ use. Its products include printing wire board materials and conductive silver paste.

Taiyo Holdings’ President Sato was asked by Mr Kawahara, a member of Taiyo Holdings’ founding family, to become the CEO around ten years ago. Prior to becoming the CEO, Sato worked for a consultant firm. Mr Sato led the restructure of Taiyo Holdings, but he maintained a policy that insists employees do not forget to smile and laugh when they work at Taiyo Holdings, which is a reason we like this company very much.

We believe the demand for resist ink, which is used by many kinds of semiconductors in various industries, will increase when the global market crackdown settles. We also have a positive view with regards to the EV market for 2022, so we have maintained exposure to semiconductor manufacturing and its material producers.

As always, we invite investors, or prospective investors in the Strategic Japan Opportunities Fund to discuss the opportunities with the investment team if they would like to understand our views on the current situation and the positions held in the portfolio. Please do not hesitate to contact Adam 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 04/02/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.