Market Environment
- Japanese equities in local currency terms have surpassed most developed markets this year; however, at the end of the quarter they ended lower in U.S. dollar terms as the Japanese yen resumed its weaker trajectory. Higher-for-longer U.S. interest rate rhetoric has challenged the yen and while a cheap currency is good for Japanese exporters, it's a disincentive to international investment inflows and can create spending challenges for domestic consumers.
- Still at the macro level, the upward bias toward inflation and wage growth is putting the government in a difficult position. Investors are speculating that the central bank will raise policy rates later this year even though economic growth is weak.
- In the market, performance was driven by large-cap stocks as they responded to regulator demands to improve capital efficiencies by selling down cross holdings and buying back shares. Growth-oriented companies struggled while small caps underperformed. Sector-wise, financials, energy and utilities were solid performers and companies in the technology space benefited from the expansion of the global artificial intelligence (AI) supply chain.
Contributors and Detractors
- For the quarter ended June 30, 2024, the Matthews Japan Fund (Trades, Portfolio) returned -2.17%, (Investor Class) and -2.12% (Institutional Class) while its benchmark, the MSCI Japan Index, returned -4.24% over the same period.
- On a sector basis, the top three contributors to relative performance were industrials, consumer discretionary and information technology (IT) due to stock selection. The top three detractors were real estate and consumer staples due to stock selection and energy due to zero allocation.
- The largest contributors to absolute performance during the quarter included Hitachi (TSE:8036, Financial), a multinational electronics conglomerate, Tokio Marine Holdings (TSE:8766, Financial), an insurance company and Recruit Holdings (TSE:6098, Financial), a human resources (HR) company. The top three detractors to performance included Tokyo Electron (TSE:2760, Financial), an electronics company, Fast Retailing (TSE:9983, Financial), a clothing manufacturer and retailer and Shin-Etsu Chemical (TSE:4063, Financial), a chemicals company.
Outlook
- We remain constructive on Japanese equities for the second half of the year for three reasons: resilient earnings growth supported by exports and AI themes; capital efficiency gains; and positioning—global investors remain underweight to Japan which leaves valuations at a relatively reasonable level, in our view.
- The yen's ongoing weakness offers headwinds and tailwinds for Japan's economy and markets. The potential onset of a Fed rate-cutting cycle and the likely weakening of the dollar that it will likely bring, offers the prospect of a more stable and stronger period for Japan's currency market.
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
The views and opinions in the commentary were as of the report date, subject to change and may not refect current views. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions refect 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 proftable 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.
