Stand: 30.11.2024
Market Review The market gained 2%, remaining sensitive to foreign exchange moves, underperforming the global market that gained 4% in JPY. The yen weakened to 152 per US dollar, -6% by theend of the month, hitting the lowest since July after Japans ruling coalition failed to win a parliamentary majority for the first time since 2009. The increasing odds of Trump winning theUS presidential election have also weakened the yen. Mega caps explained all the market gains as Large and Mid-caps were basically steady. Mega Value gained 5% in particular.Eight out of the eleven sectors returned positively. The Financials sector was up by +5%, led by Banks +7% on higher US rates. Pharmaceuticals and Semiconductors rebounded by+6% and +5% respectively reverting some of their September slump of -10% and -7%. The Materials sector lost -2% on weak global demand. Domestic sectors such as ConsumerStaples, Real Estate, as well as Software & Services within the IT sector declined as well. The Bank of Japan left its interest rate policy unchanged but kept the door open for near-termrate hikes. The BoJ policy will likely remain data-dependent. Meanwhile, Rengo, Japans largest labour union federation, called for continued wage growth of 5% or more. Earningsseason has started at the end of the month. The market reaction has been very volatile so far, seeing harsh correction for companies with high market expectations. Fund Review The fund was broadly flat, underperforming the benchmark by 1.9pts. Both sector allocation and stock selection were negative. Half of the detrimental sector allocation a quarter ofthe underperformance was due to an underweight in the Health Care sector. The stock selection was negative due to higher domestic exposure within Consumer Discretionary,Consumer Staples and Industrials. Simultaneously, an underweight in Mega caps explained one-third of the underperformance. Most of the underperformance is explained by highexposure to domestic names 8 of the 10 main detractors which are seen to be disadvantaged by a weak yen due to higher input costs. The retailers Matsukiyococokara and Serialost -11% and -10% respectively, as well as the packaging company Rengo -7%. Separately, Keisei Electric dropped -6%, likely due to the successful IPO of Tokyo Metro. MizuhoFinancial Group, one of the largest active weights in our portfolio, was the largest contributor gaining +9%. The 2% position in Denso was sold due to weak global auto demand, whileBridgestone re-entered the portfolio at market weight as the valuations have become attractive after a -15% correction since we exited it in June. The Real Estate sector exposure wasincreased by topping up Mitsubishi Estate by 2pts and newly initiating Mitsui Fudosan at market weight on an improving office market in the Tokyo area. The Financials were alsotopped up through MUFG +1pt and Resona +1pt on the current rates environment. Following the exit of Shin-Etsu Chemical last month, Marubeni was topped up by 1pt. KyushuRailway exited the portfolio as the valuations have become expensive following a 30% return since initiation, while we have built a small position of Tokyo Metro through its IPO.Square Enix also exited the portfolio on a 20% return since re-entering the portfolio in June. Meanwhile, Softbank Corp was further topped up by 2pts to invest in a stable high freecash flow generating company. The fund is now overweight in Real Estate by 4pts. Consumer staples have an overweight positioning of 3pts which is mostly a domestic exposure. Theoverweight in Consumer Discretionary has been reduced to 3pts. Meanwhile, the fund remains underweighted in Health Care by -7pts and Industrials by -6pts. Cash is maintained at aresidual level. The ESG profile is broadly unchanged and continues to outperform the benchmark, comparing particularly favourable in its carbon emission intensity. Outlook The market direction has been dictated by the US dollar vs Japanese yen moves of late. While the BoJ policy remains data-dependent, the currency moves are likely to be driven bythe outcome of the US presidential election for the short term and the Fed policy, which depends on the US labour market. The earnings momentum of the multinationals would largelyremain dependent on the yen moves, while domestic companies should remain supported by stable earnings and attractive valuations on relative. TOPIX valuations are at 13.7x 12-month forward P/E, 1.33x P/B and 2.3% dividend yield. The Fund is trading at 13.7x, 1.18x and 2.5% respectively with a slight discount to the market focusing on domestic companiesand reasonably priced free cash flow generators. The team is keeping an eye on quality names with reasonable valuations that can weather the potential volatility in currency moves.