Stand 31.07.2024
The Fund rose +0.3% (I JPY share class; +0.2% for the D JPY share class) in June compared to an increase of +1.5% in TOPIX, a nd a rise of +0.6% in the Russell/Nomura Large Cap Value Index (all figures in yen, total return). It was a month of two halves, where equities retreated before rallying again in the second half of June. Growth beat Value across the spectrum, with Small Cap Growth the best performing Russell/Nomura style segment, and Mid Cap Value the worst. Once again the breadth of the market was narrow. The theme of AI and semiconductors continued to dominate the market, both globally and in Japan, with associated stocks takin g their cue from Nvidia which became the worlds most valuable company mid-way through the month. Meanwhile more defensive areas and stocks associated with domestic reflation were shunned. The market moved to partially price in a future rate hike i n response to the weakening yen, with financials performing strongly, while some more leveraged industries underperformed. TOPIX finished the month on a strong note, almost at a new high following a quieter few months. This is despite euphoria having been seemingly removed from the market as strategists have sounded increasingly downbeat over the short -term prospects given yen weakness and a domestic economy suffering from a mini cost-of-living crisis (exacerbated by the weak currency). However, the medium-to-long-term bullish scenario of a shift from deflation to inflation and improved corporate management teams remains intact. The Bank of Japan held their latest monetary policy meeting during June and as expected there was no change to the base rate. Surprisingly, there was no reduction in planned JGB purchases. There had been a lot of talk in the media over the preceding f ew weeks about the BoJ planning to reduce bond buying (currently Y6tn per month) as part of the process of QT. Whilst the BoJ has agreed in principle to reduce the JGB buying, they will wait until next months meeting and will then confirm a more detail ed strategy for the next 1-2 years after talking to market participants. Overall, this was more dovish than the market anticipated, although Governor Ueda tried to put a hawkish spin on it by saying the size of the cut to bond buying will be substantial. With no action by the BoJ this removed any support for the yen which weakened beyond Y160 versus the dollar and there remains quite a wait until the next monetary meeting which will be on the final day of July. Global equity markets are showing signs of excessive optimism, euphoria even, in certain segments. In Japan there have been very strong gains in semiconductor names (AI theme), and also within the Japan Value Magnificent Seven, which we have previously highlighted. The latter group have performed incredibly well on the likes of a weak yen, the Warren Buffett effect, high liquidity, and a central place in the corporate governance movement. We do wonder now whether what we would call “stage 1 of Japans corporate governance bull market is somewhat euphoric. The market has largely picked the low hanging fruit in terms of idle assets (cash, property, cross shareholdings), and has focused on a narrow range of companies who are talking the talk. Companies tha t dont fit into either of these baskets have been effectively ignored. We have had many meetings with corporates recently, and our impression is indeed that the pace of change is uneven. But we think the direction of travel is clear, the laggards will even tually improve, and their valuations are much more compelling. It may now be time for the market to focus on the second phase of the corporate governance revolution. This involves more complex initiatives, including radical improvements to underlying profita bility and the successful reform of cost structures, business models and business portfolios, which will take time to implement. Whilst more challenging, these longer-term solutions should extend the longevity of corporate governance reforms as an investment story and the stock-specific upside if successful reform is implemented could well be very significant, especially where expectations are low. *A word on terminology Companies listed on the Tokyo stock market are divided into two groups by size: Large and Small; with Large further subdivide d into Top (largest) and Mid (medium). Japanese listed companies are also divided into two groups by valuation - showing how high a price investors are prepared to pay for their shares. The measure used is the Price to Book ratio (PBR), which compares the company s share price with the accounting value of its assets. Companies whose PBR is low are known as Value (cheap), while those with high PBRs are known as Growth (expensive). Japan CoreAlpha targets stocks in the Large and Value segments. The share price performance of companies in these two groups is therefore key to the Funds performance.