JPMorgan Japan Small Cap Growth & Income plc (LON:JSGI) published their commentary for December 2021.
Month in review
The TOPIX rebounded in December, recording its first rise in three months, returning 3.3%. Gains for Japanese equities were supported by fading concerns over the new Omicron variant of Covid-19.
Looking at factor performance, all value-related factors were strong, in contrast to November. Value factors rose particularly sharply in early December, which we attribute to growing prospects of faster tapering at the December meeting of the US Federal Reserve. For small-cap stocks, value factors were stronger than for large caps.
The fund underperformed the benchmark over the month. Both stock selection and sector allocation had negative impacts. Over the month, low-growth value stocks outperformed at the expense of quality growth stocks. This style reversal was a headwind to our strategy.
Negative contributors to relative performanceincluded Renova, which develops and operates renewable energy power plants, and SpiderPlus, which provides architectural drawings and on-site management software for the construction industry. During the month, the Japanese government made its decision on the operator for the wind power project off the coast of Yurihonjo in Akita Prefecture, and Renova’s bid was not successful. We opted to sell our position in the stock, as the Yurihonjo decision may negatively impact long-term growth prospects at the company. SpiderPlus was sold along with other IT names, which suffered from profit taking. The largest positive contributor was our overweight position in Visional, which provides education, training and recruitment services to businesses.
Looking Ahead
As the Covid-19 vaccination roll-out progressedrapidly and the state of emergency was lifted, economic activities have been rising and fundamentals of Japanese companies continue to be strong. While there are some concerns over cost/income pressures from the global inflation trend and weaker yen, so far there are no signs of wage inflation domestically.
On the ground in Japan, Covid-19 has been accelerating the structural changes that were already taking place, especially in the area of automation and information technologies. The trends have been providing many interesting investment opportunities for bottom-up investors, benefitting from the structural changes taking place in the country. Digitalisation is one of the structural changes that we have been seeing as a positive development and growth area.
On the political front, continuity and stability remain the watchwords for Japanese politics. The LDP has a strong mandate to remain in power for the next few years, and we expect it to continue with existing policies established by previous two prime ministers over the past nine years. Key focus areas will remain digitalisation, demographics and the post Covid-19 recovery.
We expect improvements in corporate governance to continue. The corporate governance story continues to develop, and this increasingly looks structural in nature.
Japan income fund, JPMorgan Japan Small Cap Growth & Income plc (LON:JSGI / JSGI.L), targets Japan income without compromising on Japanese growth opportunities. This Japan fund is an income investing opportunity that gives investors access to a diverse and fast growing sector managed by local managers. The Investment Trust offers a regular quarterly income by paying a higher dividend funded part by capital reserves as well as revenue returns.
