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Fund manager Masaki Taketsume presented on the trust as part of the Annual General Meeting on 2 December, 2021.

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Sep 2021 Commentary

Market Review

The Japanese stock market rose by 4.4% in September as investors took a generally positive view on the change in prime minister initiated by the resignation of Mr Suga. The yen weakened against the US dollar, reaching its lowest level since the start of the pandemic in early 2020. However, against a generally weaker sterling, the yen appreciated slightly, which improved the total return for a sterling-based investor to 4.9%

The main domestic focus was on political events, which unfolded quickly following the surprise announcement of Mr Suga’s effective resignation from his position as prime minister on 3 September. Investors tended to take a positive view of the situation, and consistent foreign buying helped to push the market up throughout the month.

Four candidates subsequently emerged for the LDP leadership election held on 29 September. Although Mr Kono carried the popular vote in the first round, the election rules for the second-round voting place more emphasis the support of party factions, ensuring that Mr Kishida ultimately emerged victorious. The leading female candidate, Ms Takaichi, also provided additional support to Mr Kishida in the second round, enabling him to secure a slightly stronger mandate than might have been originally expected.

As LDP party leader Mr Kishida becomes Japan’s 100th prime minister and moved quickly to form his new cabinet from 4 October. An establishment politician within the LDP, Mr Kishida should be essentially a safe, if unexciting, choice to guide Japan through the next stage of its post-Covid recovery. We expect no change in the direction of monetary or fiscal policy as a result, and the likely shape of next major stimulus package should emerge over coming weeks. Details of Mr Kishida’s other policy priorities are still sketchy, but we may see more focus on redressing inequality and a greater emphasis on restarting nuclear power facilities within a long-term reform of energy policy.

It now seems likely that the upcoming general election could be held at the earliest practical date, on 31 October. The LDP will be looking to retain its current majority which should easily be possible given the currently fragmented opposition parties. The LDP will also hope to gain some credit from the lifting of the state of emergency on 30 September which should allow a recovery in consumer confidence. Mr Kishida also inherits a stronger position in the vaccination programme which has sustained strong momentum in recent months after the very slow start seen in the first half of the year.

Economic data reflected the impact of the continued state of emergency on consumer confidence. Industrial production was also weak, primarily due to the production cuts announced by Japanese auto makers as a result of the global semiconductor shortage. As a result, although second quarter GDP has been revised up from the initial reading, expectations for the third quarter are being edged down. Meanwhile, inflation has crept back into positive territory as several one-off factors begin to drop out, but there is still little chance of the type of short-term inflation spike seen elsewhere.

Performance review

The portfolio performed in line with the benchmark in September as a positive contribution from stock selection matched a small negative from sector allocation

Style factors tended to provide some support for the fund in the latter part of the month.

The largest positive contribution came from Tokio Marine, a major casualty insurer, which outperformed sharply from mid-September after announcing a share buyback. There was also a positive impact to relative performance from Daikin, a global air conditioning supplier, which is not held in the portfolio.

The largest offsetting negative contributions came from Nichias, a specialist in heat insulation, Park24, which operates car parking sites and car sharing service.

Outlook

With the general election likely to be held at the end of October, and a clearer picture of the next round of fiscal stimulus emerging ahead of that, the focus on politics should soon fade. Investors are then likely to concentrate instead on the prospects for corporate profits, including the interim result to the period to the end of September. We have recently seen a further pick up in the positive revision cycle in Japan, as investors anticipate a recovery in consumer confidence after the successive states of emergency imposed since May. However, we are also aware that trend may be partly offset by rising input costs, even while overall Japanese consumer price inflation remains subdued.

The domestic economy should also benefit from the vaccination programme effectively reaching all the population by the end of November. Of course, the risk remains from new variants or an increase in infection rates during the winter, but the new prime minister has the opportunity to preside over a reopening of the economy for domestic consumption, especially in service sectors hardest hit by the pandemic.

Although the equity market has drifted off since the LDP leadership election, this may have been mainly the result of external factors including the rise in US interest rates and the problems in China’s real estate markets. Otherwise, investors seem to have taken a generally positive view of the political change in Japan. With corporate profits potentially hitting a new high this fiscal year, Japanese equity valuations look more attractive relative to other markets, particularly in view of the ongoing structural improvement in corporate governance.

Discrete yearly performance (%)

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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.

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Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. 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.

On 17 September 2018 our remaining dual priced funds converted to single pricing and a list of the funds affected can be found in our Changes to Funds. To view historic dual prices from the launch date to 14 September 2018 click on Historic prices.

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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."

Masaki Taketsume

Manager of the Schroder Japan Growth Fund