Stable government, stable strategies and stable growth

BY MITSUHIRO YUASA

After a moderate rally in August, the Japanese market declined sharply at the beginning of September, overall still posting a gain of 5.6% at the end of the month.

In September, markets were supported by stabilising markets overseas and a strong dollar, which appreciated against the Yen after the FRB decided to raise the key Federal Funds Rate. According to the Investment Adviser, the market has discounted the weak earnings prospects of Japanese companies for this fiscal year, currently maintaining its “wait and see stance”.

At the time of writing, the Topix Index, which represents the overall Japanese market, stands at P/E 13.3x and PBR 1.3x, whilst the Jasdaq Index, representing small caps, values at P/E 20.3x and PBR 1.4x.

During the month, investors were patiently waiting for the Japanese government to make the next move. Prime Minister Abe won his third term as President of the ruling Liberal Democratic Party of Japan and will form the new government. He will remain Prime Minister until the next Lower House election scheduled for September 2021, keeping the majority of his cabinet members to insure his policies will be maintained. The new cabinet has several new bills to discuss during the next extraordinary diet session, starting in October, including the proposal to provide residential status to foreign workers with certain expertise and skills.

According to recent statistics, Japan’s unemployment rate dropped to 2.4%, with the women’s labour force participation ratio exceeding 70%. In the Investment Adviser’s view, more foreign workers are needed in industries such as healthcare, construction and trucking. The team has recently visited the Government’s Cabinet Office, meeting various people who are in charge of related policies and enquired about their future plans. They confirmed to be in the process of drafting policies, hoping that these will be passed during the next diet. The Investment Adviser believes that there are additional ways to cope with the country’s challenges, eventually leading to an increase in GDP.

KATITAS (8919), which was added to the portfolio at the beginning of 2018, provides real estate services such as the management of second-hand houses, marketing, brokerage, and other related services. The Company’s President Arai changed its real estate business style, requiring every salesman to handle the purchase of a house, transformation, and sale. Nitori, which is a listed furniture company in Japan owns 34% of KATITAS, providing furniture to its houses. The Company derives 40% of total sales from e-commerce, as such a key marketing strategy is to increase traffic to its website, listing furnished properties. The Company currently trades at P/E 24x, PBR 7.6x and ROE 34.0%.

The team will maintain the current portfolio for the time being.

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The views and statements contained herein are those of Rheos Capital Works Inc in their capacity as Investment Adviser to the Fund as of 12/10/18 and are based on internal research and modelling.

Further insights

October 2018

September update - Cautious view maintained

The Strategic Europe Value Fund returned 0.58% over the month, slightly outperforming its benchmark (+0.53%). Stock selection was strong during September, particularly in the Information Technology and Consumer Staples sectors.