The Liontrust Japan Equity Fund returned -5.7% over the fourth quarter, versus the TOPIX’s -5.2% gain and the IA Japan sector average of -4.8% (both comparator benchmarks)*.
Again this quarter, while the larger stocks held up well, gaining over 2%, it was the smaller category Mothers and JASDAQ Indices that lagged, falling by -12.4% and -7.6% respectively. Largely because of the threat from higher interest rates that impacts longer duration investment assets such as growth stocks.
The TOPIX spent the quarter within a relatively tight trading range of between 2,060 and 1,920, starting at the 2,040 level. The market initially lost about 100 points as the selling of tech shares gained momentum, led by Nintendo. The Index then swept back up to its 2,060 mid-November high for the quarter after Pfizer’s revelation that its anti-Covid-19 pill cut hospitalisations and deaths amongst high-risk patients by around 89%. This was almost immediately reversed by the Omicron variants success in spreading rapidly which dented hopes of economic reopening across the world, then upon the realisation that the new variant was more transmissible but a lot less deadly, the markets regained some of their previous composure and spent most of December see-sawing between the two before closing at the 1,990 mark.
The Fund’s equity portfolio underperformed over the quarter due to its overweight exposure to the interest rate sensitive sectors, particularly the financials and real estate, as well as some more cyclical areas such as the energy, industrial, and materials sectors. In addition, the Fund’s overall return was hindered by being underweight in the information technology sector, though its industrial and consumer discretionary holdings stocks, as well as the absence of utility and telecoms, managed to almost offset the prior negatives.
As previously commented on, individual stocks showed disparate performance often strongly contrary to the underlying sector’s returns. For instance, whilst overall materials fell by -1.9%, the underlying subsectors varied greatly with industrial gases falling by more than -10%, whereas suppliers to the semiconductor industry achieved gains of around +5%.
Similarly, relative outperformance within the more or less flat industrials was shown by Daikin +6.7% (air conditioning) as management appeared to raise their results guidance and Keyence +7.9% (machine tools) on results exceeding consensus forecasts. By contrast, Mitsubishi Heavy Industry (MHI), a heavy engineering conglomerate declined by -12.1% on general economic fears and Nabtesco, a supplier of a broad range of precision parts fell -19.9% on its slight operating earnings miss and therefore the expectation that it would fall short of management guidance estimates for the full year.
Financials overall loss of -2.2% for the quarter averaged out the subsectors where property stocks fell by more than 10% largely based on declining demand for office space given increased working from home trends. While non-bank broad financial service providers rose by more than 10%, such as Orix, on news of a potential sale of a software subsidiary as well as its successful move into financing “green” projects such as solar panel installation on industrial buildings.
In the consumer discretionary area, Toyota was the standout stock. The company revealed its intention to ultimately produce both pure EVs as well as hydrogen fuel cell powered vehicles and hybrids, thus filling a perceived gap in its current product range which lifted its share price by 5.3%.
As previously stated, our investment thesis remains that we expect Japanese equities to do relatively well based on their balance sheets and balance of operations being tilted towards the non-OECD and the more cyclical sectors. We expect inflation’s stickiness to become more apparent and force central banks to raise rates further and faster than generally expected. As a result, given the generally no/low debt condition of most Japanese firms and given increased tax burdens are likely to be imposed on US firms, the relative improvement in profitability should encourage investment into the Japanese stock market.
In December, the government approved a record expenditure of ¥55.7 trillion ($490 bn), running up an even bigger debt burden, suggesting Yen’s safe haven status remains vulnerable and will help underwrite a multi-year recovery in Japanese corporate profits. As such, the Fund will remain overweight in large, well-financed, industry dominant Japanese multinationals that are set to benefit most from the currency’s likely weakening.
Discrete years' performance (%)**, to previous quarter-end:
|
|
Dec-21 |
Dec-20 |
Dec-19 |
Dec-18 |
Dec-17 |
|
Liontrust Japan Equity C Acc GBP |
-0.4% |
13.4% |
19.8% |
-17.4% |
21.6% |
|
Topix |
1.7% |
9.1% |
14.2% |
-8.7% |
15.2% |
|
IA Japan |
1.8% |
13.8% |
17.2% |
-11.4% |
17.9% |
|
Quartile |
4 |
2 |
1 |
4 |
1 |
*Source: FE Analytics as at 31.12.21
**Source: FE Analytics as at 31.12.21. Quartiles generated on 07.01.22
Key Risks
