Commentary - Private Investor

Our trusts

Introduction

Performance

Commentary

Documents

Governance

Market summary

the exception of a brief setback in mid-November, Japanese equities gained ground steadily to record a rise of 8.7% for the quarter. The yen moved in a relatively narrow range against other major currencies and ended little-changed over the quarter, although the market return to a sterling-based investor was reduced slightly to 7.7%.

After considerable initial uncertainty over the potential outcome of October’s snap general election, the likelihood of an LDP (Liberal Democratic Party of Japan) victory increased steadily, enabling equity investors to form a view on the likely continuation of both monetary and fiscal policies. This more stable sentiment was matched by a significant pick-up in net purchases of Japanese equities by foreign investors which helped to maintain upward momentum in the market after Mr Abe’s election victory was confirmed.

After a couple of months out of the headlines, North Korea reignited geopolitical risk in November with a further long-range missile test. There were no obvious signs of constructive engagement from any of the interested parties, making any resolution of this issue difficult to forecast.

The latest quarterly corporate results season continued the strong trends seen in the previous three months as the majority of companies again exceeded expectations and the positive cycle in earnings revisions was maintained. Individual share prices reacted positively to any evidence of improved pricing power as Japan exits a long period of deflation.

After some slightly disappointing economic numbers seen in November, virtually all the data released in December exceeded expectations. The unemployment rate declined to 2.7%, a new low for this cycle, while the number of people employed extended the rising trend seen throughout 2017. Inflation data also unexpectedly improved and industrial production and retail sales were comfortably ahead of forecast. Meanwhile, the Bank of Japan’s quarterly Tankan survey recorded the strongest sentiment among large manufacturing companies for more than 11 years.

Investment outlook

Having seen gradual but persistent improvements throughout 2017, Japan’s economy is entering 2018 in relatively good shape and this is reflected in robust corporate profit growth. Although some of this has already been discounted by investors in 2017, expectations for the strength and duration of this cycle are being extended, leaving room for valuations to rise further from here.

The main political events which could shape domestic policy this year include the end of Mr Kuroda’s current term as governor of the Bank of Japan in March and the expiry of Mr Abe’s term as leader of the LDP in September. We currently see no serious challenge to either of the incumbents. In the absence of any significant domestic political uncertainty we would continue to see the main risks to Japan being external.

The merger of property investor Kennedy Wilson Europe Real Estate (KWE) with US-quoted real estate group Kennedy Wilson completed in the period. Kennedy paid a premium price to acquire the remaining shares in KWE that it did not already own – it had retained a majority shareholding after originally floating the business off in 2014.

Although we expect no change in policy from the Bank of Japan in the near term, the ongoing improvement in the domestic economy is leading to growing speculation about how and when the authorities might declare that Japan has exited deflation on a sustainable basis. The mechanism for any subsequent tapering of monetary policy is unlikely to affect our views on individual stocks or their long-term profit potential, but could have implications for overall market sentiment and foreign investor activity. At this stage we would still expect any moves towards an implicit normalisation of Japan’s monetary policy to provide a positive environment for equities, however as with any forecast, it cannot be guaranteed.

Quarterly overview

The Fund outperformed the benchmark in the quarter mainly as a result of positive contribution from sector allocation.

The strongest individual stock contribution came from SK Kaken, a small cap paint manufacturer which recovered after underperforming over the previous six months. Nippon Thompson also had a positive impact after rising sharply in late December.

These gains were partly offset by a negative impact from KDDI, a major telecom operator, which declined in December, in line with the whole sector, on fears of increased competition. Hi Lex, a small cap auto parts supplier, also underperformed.

What are the risks?

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.

The Company invests in smaller companies that may be less liquid than in larger companies and price swings may therefore be greater than investment companies that invest in larger companies.

The Company will invest solely in the companies of one country or region. This can carry more risk than investments spread over a number of countries or regions.

The Company holds investments denominated in currencies other than sterling, investors should note that exchange rates may cause the value of these investments, and the income from them, to rise or fall.

The Company may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.

Portfolio holdings

Download

Never miss an update

To receive regular notifications, please register for our email updates.

Latest insights

Learn more about our approach to managing investment trusts and access the latest ideas and opinions from our investment teams.

Contact Schroders

Schroders is a world-class asset manager operating from 29 countries across Europe, the Americas, Asia, the Middle East and Africa.

Worldwide locations

For any further questions, please contact us.

Please remember that the value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Marketing material.

Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England.

Schroder Unit Trusts Limited is an authorised corporate director, authorised unit trust manager and an ISA plan manager, and is authorised and regulated by the Financial Conduct Authority.

Select a region

Select a country/region

Select a site

Retail Investors

Retirement Services

Mutual fund investment

Asset Management

Private Investor

Asset management

Wealth management

Select a region

Select a country/region

Select a site

Retail Investors

Retirement Services

Mutual fund investment

Asset Management

Private Investor

Asset management

Wealth management

Schroders in the UK

SCHRODERS Global

LATEST CAREERS

LATEST NEWS

Sustainability

Multi-Asset Solutions

Investment trusts

Global Investor Study

Markets

investIQ

Investment Trusts

Related Search

Schroder Japan Growth Fund plc

"I seek to take advantage of local knowledge to provide access to areas of the Japanese market with the greatest potential for added value."

Andrew Rose

Japanese Equities Fund Manager