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Currency hedge knocks Aberdeen Japan’s performance

Aberdeen Japan has announced results for the year ended 31 March 2016,  over the year, the net asset value returned -6.2%, compared to the benchmark Topix return of -1.7%, in sterling terms.  They say this 4.5% NAV underperformance is largely due to a loss on the currency hedge almost all of which came in the first quarter of 2016 when the yen strengthened despite negative interest rates and Brexit worries weakening sterling.  A further negative impact of the gearing amounting to -1.7% was offset by the good stock selection seen at the portfolio level relative to the index. The Board is recommending a final dividend of 4.2p in respect of the year ended 31 March 2016 (2015 – 2.6p).

The Trust’s equity portfolio (i.e. excluding the impact of hedging) performed in line with the benchmark’s return which fell by 1.7% over the review period. The Trust’s holdings in the consumer staples and financial sectors contributed the most to performance. Among consumer holdings, Japan Tobacco was a notable contributor. The cigarette company’s shares did well after it unexpectedly sought regulatory approval to raise prices from April; with its application being recently approved. In addition, its solid international operations supported full-year earnings, with expanding European market share offsetting sluggish demand in Russia.

Another key contributor was men’s grooming products maker Mandom. Its earnings met expectations after lowering its forecast in the wake of a fatal explosion on its Indonesian aerosol production line. Although the company will post an extraordinary loss of 1.5 billion yen as costs related to the accident, the core personal care products business remains intact. At home, its female grooming business gained traction, with growth seen across categories and increasing demand from both inbound travellers and domestic consumers. Okinawa-based retailer San-A was another beneficiary of upbeat earnings, as brisk inbound tourism boosted sales.

In financials, Daito Trust Construction did particularly well. The rental housing builder’s shares gained from recent data that revealed better-than-expected orders in February amid still-robust housing occupancy levels. The company recently bought a 37.5% stake in home-care services provider Solasto, with the intention of building up a nursing home business through the latter’s platform. With the nation’s population ageing rapidly, demand for healthcare and nursing homes is naturally expected to increase. A lack of exposure to Mitsubishi UFJ’s shares provided a further boost as the lender came under pressure after the imposition of negative interest rates. The Trust’s holdings in Bank of Yokohama and Suruga Bank detracted from performance for the same reason. However, Suruga’s focus on retail loans is likely to provide some buffer, thereby making it more resilient than its rivals. The Trust continues to maintain a light exposure to local banks. They have been cautious about investing in the banking sector because of scepticism over its prospects.

Elsewhere, Asahi Intecc posted solid second-quarter results that were driven by healthy domestic and overseas sales of its medical devices, cost rationalisation and a favourable currency effect. The medical products manufacturer is well-positioned in the medium term, with limited competition for its market position. Upcoming product launches should provide it with further growth opportunities. Daikin Industries’ core air-conditioning business recovered, particularly in China, which makes up a significant portion of group profits. Separately, the company is acquiring US air-filter maker Flanders for US$430 million as it seeks expansion.

Conversely, Shin-Etsu Chemical continued to weigh on performance, even though its third-quarter results met expectations. Falling sales of certain chips eroded profits in the semiconductor silicon business, but its PVC segment did well because of better export margins. The company is investing 20 billion yen to expand capacity at its silicones business to meet growing demand from automotive, cosmetics and healthcare applications.

Other laggards included several holdings that were previously dampened by their exposure to China. These included Nippon Paint, Nabtesco and Fanuc. Nippon Paint cut its full-year forecast amid weak sales for its decorative and industrial paints. Machinery maker Nabtesco lagged because of lacklustre sales for its aircraft and hydraulic division, along with a rise in restructuring costs. But sales have recovered recently and demand for hydraulic equipment appears to have bottomed. The fall in robot-maker Fanuc’s share price was due to a deceleration in capital spending by smartphone makers and weaker machine-tool demand.

AJIT : Currency hedge knocks Aberdeen Japan’s performance

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