Japan income fund sizeable July outperformance as TOPIX recovers (LON:JSGI)

Japan income fundJPMorgan Japan Small Cap Growth & Income (LONJSGI), targets Japan income without compromising on Japanese growth opportunities. This Japan income investing opportunity gives investors access to a diverse and fast growing sector managed by local managers.

Month in review

As of 31/07/2022

  • The TOPIX bounced back in July.
  • After a volatile first half of the year, the portfolio posted a sizeable outperformance over the month. Both sector allocation and stock selection added value, with most of the positive contribution coming from stock selection.
  • At the sector level, overweighting the software & services sector and underweighting food, beverage & tobacco and banks added value. Overweighting the materials sector, on the other hand, detracted from performance.
  • At the stock level, our overweight position in C. Uyemura (surface finishing materials and machinery) was the top contributor to performance. Our overweight positions in healthcare-related names Medley and Asahi Intecc also added value. Our overweight position in TRE Holdings (waste treatment and recycling services), on the other hand, detracted from performance.

Looking ahead

As of 31/07/2022

  • So far, there are few signs of inflation in wages or rents in Japan, unlike in other developed countries. There are, however, some concerns over cost/income pressures from global inflation trends and a weaker yen.
  • Overall, fundamentals of Japanese companies continue to be strong, although in the short term we expect some divergence between companies with stronger pricing power and weaker companies that may struggle to pass on input-cost rises to prices.
  • Covid-19 has been accelerating the structural changes in Japan that were already taking place, especially in the area of automation and information technologies. Reopening the country post-Covid as well as the energy transition are likely to gain more attention going forward. Many Japanese companies are in a restructuring phase, too, where we see some good investment opportunities.
  • On the political front, ‘continuity’ and ‘stability’ remain the watchwords for Japanese politics. The Liberal Democratic Party has a strong mandate to remain in power for the next few years. Following the upper house elections held in July, there will be no elections in Japan for three years.
  • We have seen a shareholder return revolution in Japan, with share buybacks up 63% on last year’s record level. There have been large buybacks across many sectors, even by some companies that are considered very conservative.
  • The corporate governance story continues to develop, and this increasingly looks structural in nature. The corporate governance code has opened a door for activists, both domestic and foreign, who are helping to progress the trend.
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