Atlantis Japan Growth (AJG) has announced its annual results for the year ended 30 April 2021., during which it significantly outperformed the TOPIX Total Return Index. During the year, AJG provided an NAV total return of 22.9% and a share price total return of 31.3%, both significantly ahead of those of the TOPIX Total Return Index which, in sterling terms, recorded a 16.1% increase. The superior share price total return, over that of the NAV, reflects the fact that, over the year, AJG’s discount to NAV narrowed from 14.6% to 9.2%. At 30 April 2021, the Japanese Yen was ¥151.48 against the pound sterling, a loss of 12.3% against the previous year’s closing rate of ¥132.90.
At the end of 30 April 2021, AJG’s portfolio contained 66 companies, five more than a year prior. Throughout the period under review, the portfolio maintained overweight positions in the services, electric appliances, machinery, and information/communication sectors. The stocks which made a particularly strong contribution to the Company’s performance during the year had a tilt towards technology and growth. They included biotech materials supplier Cellsource (4880), alternative energy distributer Renova (9519), small motor maker Nidec (6594) and two semiconductor production equipment assemblers, Lasertec (6920) and Tokyo Electron (8035). Excluding cash, AJG’s portfolio was fully invested in the equities of publicly listed Japanese companies and J-REITS during the year.
Manager’s comments on the market
“The period under review was challenging for Japanese equity investors as they had to plot a course in the wake of the economic wreckage left by the COVID-19 pandemic. Share prices came under periodic pressure as authorities struggled to contain the virus. Japan imposed lockdowns and other administrative measures to curb demand and limit travel but was generally sluggish in responding effectively to the crisis.
The Japanese equity market bottomed in the middle of March 2020 as investors welcomed the global response from governments and central banks in the form of monetary easing and fiscal stimulus. Japan itself adopted financial steps to fight the pandemic, prop up the economy and protect jobs, with cash handouts and subsidies, along with pledges to invest in new digital and green technologies. So the year under review began with the Japanese market eager to anticipate such fiscal and administrative measures which would constrain the virus and rekindle growth. This expectation coupled with positive economic data sparked a major market rally, but positive sentiment was periodically curbed by concerns over a second and then a third COVID-19 wave. The impact of the virus continued to dominate the equity market until the end of the Company’s financial year.
Overseas investors adopted a measured, marginally positive, stance toward Japanese equities during the reviewed period. Selling pressure on a sustained basis emerged from domestic investment trusts, individual investors, and non-financial business corporations. The Bank of Japan and GPIF (Government Pension Investment Fund) delivered a jolt to the market in March 2021 when they announced their purchase programme of Nikkei 225 equity-linked ETFs was to be halted and that further ETF purchases were to be linked only with TOPIX indices.
The best performing sectors over the course of the year were a combination of growth (electric appliances, pharmaceuticals) and special situations (shipping and steels). There was little to distinguish between large and small capitalized stock performances. At the beginning of the Company’s fiscal year, investors favoured growth themes. However, in November 2020, midway through the Company’s financial year, market sentiment turned sharply towards value stocks on the back of announcements about the approval of COVID-19 vaccines.
The anticipated return to normality and rising global bond yields led investors to bring forward their profit recovery forecasts ahead of what many surveys had previously projected. Acting on these new assumptions, investors bought laggards in value sectors, such as physical retail, transport and banks, and kicked off a rotation out of growth stocks into value shares. As the fiscal year ended, the TOPIX Value Index and the TOPIX Growth Index had both risen by 13%.
As the pandemic raged, it continued to take its toll on corporate earnings. Operating profits of component companies of the TOPIX Index plunged by 20% during fiscal year ended 30 March 2020 and according to consensus forecasts will have declined by another 13% in fiscal year ended 30 March 2021. Recovery is projected for the following fiscal year ending 30 March 2022, with consensus estimating a 44% operating profit rebound.”
Manager’s comments on the economic outlook
“Recent economic data suggest Japan’s manufacturing economy, paced by external demand, has returned to the growth path, with Japan’s manufacturing PMI rising to a seasonally adjusted 53.6 in April, its highest level since February 2018. However, the government’s administrative actions intended to constrain the COVID-19 virus continue to depress service activity leaving a badly polarized economy. The Investment Adviser believes that if Japan accelerates its vaccination programme, eases lockdown measures, and maintains fiscal stimulus, balanced economic growth may be achieved. However, concerns linger over the risk of another COVID-19 wave, an economic fiscal cliff, and a semiconductor shortage which is impacting production in the automobile industry. Assuming another COVID-19 wave is avoided the Investment Adviser believes that, in fiscal year ending 30 March 2022, Gross domestic product (“GDP”) will recover at a 3.5% – 4.0% pace and be followed with 2.5% – 3.0% growth in fiscal year ending 30 March 2023.”