Japan equity investing: JPMorgan looks ahead at Japan’s stability (LON:JSGI)

JPMorgan Japan Small Cap Growth & Income plc (LON:JSGI) has now published its May 2023 factsheet which can be found below.

Month in review

As of 31/05/2023

  • The MSCI Japan Small Cap Index rose by 0.8% in Japanese yen terms. This was supported by expectations of further pressure from the Tokyo Stock Exchange (TSE) to push the corporate governance agenda following earlier announcements.
  • The portfolio outperformed the benchmark over the month. Both sector allocation and stock selection contributed to value.
  • From a sector perspective, holding overweight positions in materials, as well as healthcare equipment and services sectors, contributed to value. On the other hand, overweight positions in consumer durables and apparel and household and personal products sectors detracted most from value.
  • At the stock level, our overweight positions in MEC (speciality chemical) and Nippon Sanso (industrial gas) were the top contributors. MEC is a global top niche company for manufacturing advanced adhesion enhancer products used in printed circuit boards. The share price of MEC advanced on expectations of higher sales of printed circuit boards in line with the higher adoption of artificial intelligence. The share price of Nippon Sanso advanced on expectations of sustainable margin improvement. Our overweight positions in Milbon (professional use haircare products) and Tosho (sports gym operator) on the other hand, detracted value.

Looking ahead

As of 31/05/2023

  • There has been an acceleration of improvements in corporate governance and balance sheet management this year. The structural changes in the corporate governance landscape are likely to have a long and strong duration, which has brought a strong tailwind for stock selectors who are identifying companies starting to change. Corporate governance change has recently moved into a new gear, with initiatives and pressure from the TSE. Shareholder activism has started to be both accepted and successful. This domestic pressure combined with activist funds, both domestic and foreign, is a powerful combination and is by far the most important thing currently happening, in our view.
  • Under the current global environment, Japan’s stability in domestic politics and geopolitics stands out. Domestic politics have been stable with a popular Prime Minister. There is very little scope for changes in government, which has been led by the long-standing ruling party LDP, in the near future. Geopolitically, Japan is increasingly important in the region and the relationship with the US is becoming stronger.
  • The combination of structural changes taking place in the Japanese corporate sector, combined with the remarkable stability of the country, offers attractive investment opportunities for investors, in our view.

JPMorgan Japan Small Cap Growth & Income Investment Trust (LON: JSGI) is actively managed by a Tokyo-based investment team and provides access to the innovative and fast-growing small and medium-sized companies that are at the core of the Japanese economy, while paying a regular quarterly income.

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