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Market Environment
After 12 strong months, Japan’s equity markets experienced a sharp selloff and then fast recovery in early August after the Bank of Japan (BOJ) raised interest rates which contributed to a surge in the value of theyen and then quickly sought to assuage investor concerns over its macro policy. The BOJ has since backed away somewhat from signaling more rate hikes are to come.
While Japanese company earnings are less sensitive to currency moves than in the pastpartly because more Japanese companies with international revenue operate overseas hubs in local currenciesthe changing macro picture weighed on market performance in the quarter.
Despite market volatility, which was driven by concerns over a U.S. slowdown as well as tightening of domestic monetary policy, Japanese equites were supported in the period by continued strength in earnings growth,robust dividend yields and stock buybacks across sectors and industries.
Contributors and Detractors
For the quarter ended September 30, 2024, the Matthews Japan Fund (Trades, Portfolio) returned 8.37%, (Investor Class) and 8.34% (Institutional Class) while its benchmark, the MSCI Japan Index, returned 5.88% over the same period.
On a sector basis, the top three contributors to relative performance were consumer discretionary, financials and industrials due to stock selection. The top three detractors were materials and real estate due tostock selection and health care due to an underweight allocation and stock selection.
The largest contributors to absolute performance included Fast Retailing (TSE:9983), a clothing manufacturer and retailer, Asics (TSE:7936), a sportswear maker, and Hitachi (TSE:6501), a multinational electronics conglomerate. The top three detractors included Renesas Electronics (TSE:6723), a semiconductor manufacturing company, Tokyo Electron (TSE:8035), an electronics company, and Mitsubishi UFJ Financial Group (NYSE:MUFG)(TSE:8306), a leading financial firm.
Outlook
Shigeru Ishiba’s surprise victory in the ruling Liberal Democratic Party’s leadership contest and decision to hold an early general election in October adds some uncertainty to macro and government policy in the coming months. But we believe Japanese equities are in relatively good health and that recent drivers of returns earnings growth, capital market reform and corporate governance changesare intact.
In many areas, for both domestic and export- orientated and international companies, we continue to think corporate profits will increase at a mid-to-high single digit percentage growth rate in yen terms, supplementedby healthy dividends and accelerating buybacks.
We see opportunities across equity sectors, be it in defensive stocks like consumer staples or in cyclicals like autos or IT services. Over the longer term we see a general improvement in return on equity (ROE) from Japanese companies and that in turn translating into improved valuations and improved equity returns.
All performance quoted is past performance and is no guarantee of future results. Investment return and principal value will fluctuate with changing market conditions so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. Returns would have been lower if certain of the Fund’s fees and expenses had not been waived. For the Fund’s most recent month-end performance visit matthewsasia.com.
Investments in Asian securities may involve risks such as social and political instability, market illiquidity, exchange rate fluctuations, a high level of volatility and limited regulation. In addition, investments in a single-country fund, which is considered a non-diversified fund, may be subject to a higher degree of market risk than diversified funds because of concentration in a specific country.
The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Neither the funds nor the Investment Advisor accept any liability for losses either direct or consequential caused by the use of this information.
The views and opinions in the commentary were as of the report date, subject to change and may not reflect current views. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the Fund’s future investment intent. It should not be assumed that any investment will be profitable or will equal the performance of any securities or any sectors mentioned herein. The information does not constitute a recommendation to buy or sell any securities mentioned.
This article first appeared on GuruFocus.