JSGI boosted by December gains, Japan wage growth and valuations

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

Monthly – As of 2023/12/31

• With the focus on the Bank of Japan’s (BoJ’s) monetary policy meeting, Japanese equities traded in a tight range, with the MSCI Japan Index returning -0.5% over the month. At the meeting, the BoJ kept policy rates unchanged, with the current economic assessment consistent with prior comments, and offered no guidance on whether it might scrap the policy next year. As a result, the Japanese yen appreciated sharply, ending the month at 141.0 JPY/USD. In terms of style, growth outperformed value.
• The portfolio outperformed the benchmark over the month, with both sector allocation and stock selection contributing positively to performance. At the stock level, overweight positions in Lifedrink (nonalcoholic beverages) and MEC (adhesion enhancer products) were among the top contributors to performance. The share price of Lifedrink rose on results that were ahead of expectations. The share price of MEC rose on expectations of the company being a beneficiary of the bottoming out of the semiconductor cycle, with increased capital expenditure in 2024.
• Overweight positions in Rakuten Bank (digital bank) and Capcom (gaming) were among the top detractors. The share price of Rakuten Bank fell due to a secondary stake sale by parent company Rakuten Group and the overhang of future stake sales by Rakuten Group. The share price of Capcom fell on a slower offtake of its recently released titles.

Looking Ahead – As of 2023/12/31

• Structural improvements in corporate governance and balance-sheet management seen this year are expected to have a long and strong duration, providing a tailwind for stock selectors who are identifying companies starting to change. This has resulted in management buyouts exceeding JPY 800 billion as of November, levels not seen in the previous decade.
• The Tokyo Stock Exchange has been encouraging Japanese companies to improve their capital allocation, especially by returning cash to shareholders and implementing share buybacks, which are expected to lift returns on equity and valuations. A generational shift in Japanese companies’ management is also providing an impetus to push through these changes.
• Encouraging wage trends are expected to be supported by the structurally tight labour market. Wage growth, currently driven primarily by large corporates, is expected to persist and should help end Japan’s long period of damaging and seemingly intractable deflation and have a positive impact on consumption and the overall economy. The BoJ is expected to welcome these developments as, by its own estimate, Japan is only in the early stages of wage-driven inflation.
• In our view, the combination of structural changes taking place in the Japanese corporate sector and the country’s political stability offers attractive investment opportunities. As of the end of December, valuations in Japan remain compelling, trading at 15.1x forward price-to-earnings ratio and 1.3x price-to-book ratio.

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.