Lazard Japanese Strategic Equity Fund AUG Commentary 2021
Market Overview Markets were on the weak side for the rst few weeks of the month due to concerns that rapidly increasing delta variant cases around the world would side-track the current global economic recovery following pandemic period lows. However, the market made a strong recovery in the last week-and-a-half, with the TOPIX Total Return index nishing the month up a solid 3.2% in yen terms. Tokyo managed to host a reasonably successful Olympics and Japan even produced a strong showing in the medal count, particularly in gold medals.
Portfolio Review During the month, the portfolio underperformed the TOPIX Total Return Index which returned 3.2% in yen terms. Being underweight and stock selection in consumer discretionary, and stock selection in the materials and utilities sectors were top contributors to performance. Being underweight and stock selection in health care, stock selection in communication services, and being underweight and stock selection in information technology sectors were negative. During the month, the top positive contributors to relative performance included: • Nippon Steel, Japan’s largest steel manufacturer, was strong after reporting better-than-expected rst-quarter earnings and raising its full-year guidance. • Mitsui O.S.K.Lines, a leading shipping company, continued to rise due to stronger-than-expected earnings and a better-than- expected dividend increase. • Makita, a leading global manufacturer of power tools, raised full-year guidance as its rst-quarter saw continued strong demand globally. • Dai-ichi Life Holdings, a leading life insurance company, rose as the yield on 10-year U.S. government bonds hit a low in early August, and subsequently rose over the month. • Mitsubishi Corporation a major trading conglomerate, has seen a signi cant improvement in coking coal prices which until recently had lagged other commodity prices due to Chinese import restrictions on Australian coal. Conversely, the largest detractors to relative performance included: • Hitachi, an industrial conglomerate, experienced pro t taking following extremely strong year-to-date share performance combined with only in-line rst quarter earnings. • Komatsu, a leading heavy equipment manufacturer, was softer as the company delivered slightly better than expected rst-quarter earnings but failed to raise its full-year guidance. • INPEX, Japan’s largest energy exploration and production company, was weaker as oil prices softened over the month. • SoftBank Group, an investment company focused on technology and telecommunications, su ered from continued selling pressure amid investor concerns about its Chinese investments as the Chinese government continues to implement surprise policy changes. • Mizuho Financial Group, a major banking group, was weak as the bank su ered from another system outage as well as an ATM glitch during the month.
Recent Activity and Trade Rationale Daikin Industries and Mitsui O.S.K. Lines were newly added to the portfolio during the month. Daikin Industries, a leading HVAC manufacturer, was newly added to the portfolio on continued expectations of solid growth in HVACs over the medium term, as well as optionality in new product areas such as refrigerants for electric vehicles. Mitsui O.S.K. Lines, a leading shipping Lazard Japanese Strategic Equity Fund
company, was added to the portfolio as we expect elevated container rates to continue resulting in an aggressive shareholder return policy. Rengo, a leading cardboard manufacturer, was reduced due to lower expectations of improving capital return. We believe the shares remain inexpensive, however shareholder return policy is disappointing and unlikely to change in the near-term.
Outlook Unfortunately, the successful hosting of the Olympics has not led to a recovery in sentiment, as the ongoing state of emergency has limited the scope for a more robust reopening dynamic. Prime Minster Suga has been mired in blame and has a meager 26% support rating, according to a recent Mainichi Shimbun poll. While recent announcement of his decision not to run again for the LDP presidency comes as a surprise, he was already facing a challenging LDP election. National elections have to be held by this autumn and a LDP victory seems highly likely nevertheless. But who will become Japan’s next prime minster is a toss-up. However, we don’t anticipate any signi cant policy changes given the rumored candidate pool at this time. More importantly, we still believe that a number of the reforms put in place during Prime Minster Abe’s tenure have been institutionalised to a large extent, and as a result, the foundations of improving corporate governance are rm. With 56% of the population having received one dose of a COVID-19 vaccination, the case for a more robust reopening is sound as we head into the winter and the new year. Irrespective of where one lies in placing blame for the current gloom, corporate pro ts have soared thanks to Japan’s leverage to global growth. Compared to other major markets like the U.S. or Europe, Japan looks inexpensive as this earnings growth has yet to be discounted by market valuations.
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