BY MITSUHIRO YUASA
At the beginning of the year, the Japanese market rose again on the back of a “Goldilocks“ market environment. During the month, the Fund returned 2.13% to investors, outperforming its benchmark by 1.07 percentage points.
Overall, there were signs of a changing market environment in January indicated by fluctuating currencies, rising oil prices and an increase of the US bond yield. This said, the market absorbed these developments on the back of strong corporate earnings reports which already supported the market during the previous quarters. Q3 earnings were better than expected, with the magnitude of the quarterly earnings growth being smaller compared to the previous quarter. Generally, inflows to domestic small cap funds increased rapidly and pushed emerging market stocks higher in January.
Going forward, the Japanese macro environment will be impacted by how companies are managed and employees communicated with. The Investment Adviser believes that companies which try to improve the working environment by raising employee salaries, may be able to maintain their current labour force for the next few years. At present, the female working participation ratio already exceeds 70% in Japan, which means that the labour force may struggle to grow unless the country adjusts its immigraton policy.
The latest consensus EPS growth forecast for the fiscal year 2017 (ending in March 2018) stands at +13.0% YoY and at +5.6%YoY for the next fiscal year. Prime Minister Abe has asked the management of domestic companies to raise salaries by 3%, which Mr. Sakakibara, chairman of the Japan Business Federation and known as “Keidanren”, acknowledges should support domestic consumption.
Currently the valuations of domestic small caps are increasing due to rapid inflows into small cap funds. The Investment Adviser is carefully considering the valuations of each company in the portfolio and its organic growth potential. For the time being however, the Investment Adviser will maintain the current portfolio.
The views and statements contained herein are those of Rheos Capital Works Inc in their capacity as Investment Adviser to the Fund as of 09/02/18 and are based on internal research and modelling.