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Q3 Commentary: As of 30th September 2018

Market summary and Performance Review

It was a quiet summer for the market with the index trading within a 5% range and closing unchanged, and the Yen/Stg exchange rate doing broadly the same. September has been more active with market up about 5% and the currency weakening. Style factors had less of an influence on the market compared to recent history.

The main domestic drivers over the quarter were Q1 results announced in August, short term economic distortions caused by a succession of natural disasters, a return to relative domestic political calm and speculation ahead of the BoJ's end July meeting. Corporate results for the first quarter were moderately supportive and financials rallied briefly ahead of the BoJ meeting on the view that the central bank may take a more sympathetic view in relation to the sector, suffering from adverse side effects of prolonged monetary easing.

Global macro factors were never really off the agenda and by and large caused international investors to adopt a cautious (net sell) stance. Trade and emerging market volatility were the main culprits. In relation to the former, Japan has stayed largely out of the fray but the ratcheting up of trade tension between the US and China, Japan's 2 largest export markets, has been a source of concern.

Commodity prices continued to rise and this was apparent in the sector winners and losers. The oil sector was the top performer and the airline sector the worst. More defensive sectors such as telecoms and pharmaceutical also performed well although individual stock drivers also played a role here ( Softbank in the former’s case and Eisai in the latter's). Other under performers were a mixture, real estate, construction, food and the tyre sector

Over the 12 months to end August the market rose 9% in yen and slightly less in sterling, reflecting marginal yen weakness relative to the pound. Most of the positive return came in the initial 4 months of the period under review. The best performing sector was again the oil sector, reflecting consolidation within the refining sector as well as the higher oil price. Cyclical sectors such as steel and shipping were amongst the largest under performers. Tyres also underperformed, impacted by Bridgestone's weakness. The service sector, pharmaceuticals and trading companies were some of the other best performing sectors over the year.

Discrete yearly performance (%)

	Q3/2017 - Q3/2018	Q3/2016 - Q3/2017	Q3/2015 - Q3/2016	Q3/2014 - Q3/2015	Q3/2013 - Q3/2014
Share price	14.7	18.2	21.5	13.4	4.1
Net Asset Value	11.3	17.0	28.0	6.8	6.4
Tokyo Stock Exchange 1st Section Index (TOPIX) (TR)	13.0	12.6	32.2	6.3	1.3

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.

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