The Japanese equity market (The Nikkei 225) rose by 11.2% during the quarter with most of the gain seen in November when global markets rallied on vaccine-related news flow. Sentiment in Japan was tempered slightly by a gradual strengthening of the yen against the US dollar throughout the quarter. Conversely, the yen weakened consistently against a generally stronger sterling which restricted the total return for a sterling-based investor to 7.5%.
While many global markets saw some style reversal in the last three months, this effect has been very muted in Japan so far, and value stocks underperformed the broader market across the quarter. Small cap stocks underperformed significantly, unwinding much of their outperformance seen in the previous six months.
Domestic factors generally took a back seat to global drivers, especially the positive news flow on the results from various vaccine trials. Equity investors responded very positively in November to the idea that tackling the virus could eventually become a logistical exercise, albeit an extremely complex one. The slow-motion results of the US presidential election ultimately reduced one potential source of uncertainty.
All the available data shows that Japan’s experience of Covid-19, in terms of incidence and mortality, continues to be markedly different from the US and Europe. As a result, the government was able to continue to encourage private consumption for most of the quarter through its “Go To” campaign for domestic travel. In October, this was supplemented by the launch of “Go To Eat” discounts to support local restaurants in each prefecture. Although the absolute levels of virus infection in Japan remained significantly below other developed countries, there was a pick-up towards the end of the year, leading to further public criticism of government policy. During December, these concerns began to impact on the popularity of new Prime Minister Suga and ultimately led to the suspension of the “Go To” campaigns. By the end of the year it was becoming increasingly likely that a state of emergency could be re-imposed for the first time since May, although even this would imply significantly lighter restrictions than those seen in Europe.
In the final weeks of the year, most of the focus was on the likelihood of further stimulus measures being passed in the US. Japan’s cabinet also approved a large additional fiscal package, to be funded by a further supplementary budget. Domestic economic data released in the quarter continued to reflect a slow but steady recovery after the downturn seen earlier in the year that, although severe, was less dramatic then many other countries. Some survey data released in December, however, including the Bank of Japan’s Tankan and the Economy Watchers’ Survey, highlighted the fragility of consumer confidence moving into a period of rising infections.
The corporate results season completed in November with an unusually high proportion of companies beating estimates. The revision index (Topix Index in GBP) quickly turned positive and further upward revisions to profits are possible across many sectors in the second half of this fiscal year. We also saw evidence of share buybacks beginning to return to previous levels, supported by the strong financial position of many Japanese companies.
 A value stock refers to shares of a company that appears to trade at a lower price relative to its fundamentals, such as dividends, earnings, or sales, making it appealing to value investors.
 A share buyback is a transaction whereby a company buys back its own shares from the marketplace.
The fund outperformed the benchmark during the quarter, thanks to a strong positive contribution from stock selection, which outweighed a small negative from sector allocation. The Fund’s gearing also provided a positive impact on performance in the quarter
Style factors were less dominant across the quarter as a whole, although value stocks underperformed sharply in late November before staging some recovery December. There was also significant relative weakness in small cap stocks, especially in October and November.
The largest positive individual stock contribution came from Disco, which produces specialised equipment used in semiconductor manufacture. The stock had been temporarily weak in the previous quarter before resuming its longer term outperformance driven by strong order flow. There was also a strong contribution from Kureha, a chemical company specialising in resin production. The stock price rose sharply in December, reacting to specific drivers in the company’s environmental business and the potential for growth in demand for its products used in lithium batteries
These largest negative contribution in the quarter came from Santen Pharmaceutical, an eye-care specialist. The company announced positive results in early November, but this was accompanied by news that one of its major drugs will be included in China’s centralised purchasing programme. This is likely to reduce the drug’s sales potential and resulted in a steep fall in Santen’s share price in November. Market dynamics in the fourth quarter also resulted in several negative impacts from a range of large cap stocks that are not held in the portfolio, the most significant of which was Sony.
|Q1/2016 - Q4/2016||Q1/2017 - Q4/2017||Q1/2018 - Q4/2018||Q1/2019 - Q4/2019||Q1/2020 - Q4/2020|
|Net Asset Value||2.5||24.7||-15.5||35.4||-6.5|
|TOPIX TR JPY (GBP)||5.1||18.2||-15.2||30.8||-8.5|
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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.
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