The Japanese market rose slightly in April


Fund Commentary
18 May 2017


Overall, the Japanese market rose slightly in April, but small caps which had previously rallied declined during the period. The North Korean threat continuously capped the Japanese market, but investors took comfort for a while after several important dates passed without incident.

The yen appreciated until the middle of the month, dragging down large exporters, but investors who had taken a “wait and see” stance prior to the major results season due to start in May, showed renewed interest as the yen depreciated toward the end of April. The Korean and French elections also brought market uncertainty but investors have not abandoned hope for the future of the global economy.

There were a number of trades in the portfolio this month including the purchase of Sumida Corporation (9962) and Mainichi Comnet (8908). Sumida Corporation manufactures coils for electric gadgets and Mainichi Comnet provides student dormitory management services. During the month Vector (6058), Ibiden (4062), Sato Holdings (6287), MonotaRo (3064), and Digital Garage (4819) contributed positively to portfolio performance. On the other hand, Genky (2772), IDOM (7599), Kewpie (2809), Renesas Electronics (6723), and Japan Investment Advisor (7172) performed negatively over the same period.

Among the positive performers this month was (2326) Digital Arts. The company develops internet filtering software for business, private, and educational use. Its products protect users and networks from harmful content and prevent inappropriate usage. The company has changed its sales policies, especially its pricing, in order to make their software more affordable for customers. As a result, sales have increased to regional local bodies for their cloud network security this fiscal year. Their Information Rights Management (IRM) software which prevents emails being sent to the wrong location and prevents leaks of important company information, increased its sales dramatically recently. The company trades on a P/E of 32x, PBR 8.6x and has a ROE of 20.8%.

FY2016 earnings results should mostly be in line with expectations. We are currently in the middle of the earnings reporting season for companies whose fiscal year ends in March, but the Investment Adviser expects around 11% growth in FY2017 net profit. In fact, this is better than initial expectations given the sharp appreciation of the yen and increasing geopolitical uncertainty. The market has now discounted a lower growth rate, based on a USD/JPY rate of 105 compared with the previous year’s 110.

Regarding the North Korea issue, Japan has not experienced a geopolitical threat so close to home in the last 70 years. US tensions with North Korea are increasing apparently without thought for Japan and its neighbours. It may not take long for investors to get used to the situation, but the market may be vulnerable should people conclude there is imminent danger.

Elsewhere, Macron’s win in the French presidential election provided some relief for the market. However, despite the macro picture, the Investment Adviser continues to focus on companies’ bottom lines and will continue looking for good companies with potential for the portfolio. For the time being however, the Investment Adviser will be maintaining 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 12/05/17 and are based on internal research and modelling.