Alma Eikoh Japan Large Cap Equity Fund

Market Review and Outlook

Topix advanced for the seventh straight month in October, up 6.20% on a total return basis. While the continuing strength of global markets driven by AI related tech stocks was a positive factor, of greater significance was the positive reaction of investors to the election of Sanae Takaichi as Prime Minister. Under the new administration investors anticipate fiscal stimulus, defence spending increases and accommodative monetary policy. The market saw a concomitant weakness in the Yen which fell from Y/$ 147.9 to 154.0 over the period; the BOJ left its policy rate unchanged at 50bps at its October meeting. Foreign investors returned to the market in October committing Y1.5trn over the month with heavy flows coinciding with Takaichi’s election as Prime Minister. The strong rise in the market was led by technology, defence and export-related stocks. Defensive and domestic sectors fell over the month creating unusually dramatic disparities in performance between different sectors and stocks. The Nikkei 225 outperformed Topix by a little over 10% reflecting the close to 30% weight that just three technology stocks; Softbank, Advantest and Tokyo Electron, have in that index. Topix Growth strongly outperformed Topix Value, rising by +9.0% against +3.6%, but still lags by -4.3% for the
year as a whole. Economic data announced over the month was unsurprising, one interesting point to note however was the announcement by the Japanese Trade Union Confederation, Rengo, calling for wage growth of 5% for large companies and 6% for small and medium sized enterprises in the 2026 spring Shunto wage negotiations. This represents a hardening of their language compared to 2025 as they seek to ensure real terms wage growth for their members; if achieved this should support consumption and maintain upward pressure on domestic prices.

A key challenge for investors in the Japanese market is to understand the impact and policy ramifications of the new Takaichi led government; we have seen the initial positive reaction by investors, and we believe this is a logical response. The new coalition administration holds a stronger position than the previous LDPKomeito alliance under Ishiba. The coalition controls 231 seats out of 465 in the key Lower House, just two short of the 233 required for a majority, 16 more than the previous administration. Encouragingly Sanae Takaichi was appointed Prime Minister with 237 votes in the lower house, avoiding a run-off vote having secured the support of the six independent Lower House members of parliament. If this pattern is repeated it will allow the administration to govern much more effectively than the previous one that needed the support of other parties to pass any legislation. A justifiable criticism of post Abe administrations was that they lacked political confidence and a clear agenda, this is something that Takaichi and her government bring to the table. Coalition policies are clearly defined and laid out in a detailed plan. As a centre right party standing with the LDP on revising the constitution, JIP is a more natural coalition partner than the inherently pacifist Komeito implying
fewer ideological tensions. Successful leaders of the LDP such as Abe and Koizumi have all enjoyed a high level of support from the wider Japanese populace. This, rather than factional politics and its back-room deals, has been what has united the LDP in its support, and it’s lack is what undermined Ishiba and his predecessors. A Nikkei voter poll has put support for the incoming cabinet at 74%, double that of the outgoing cabinet and much higher than the initial polls for Ishiba at 51% and Kishida at 59%.There was a huge increase in support from those aged 18-39 from 15% to 80%, these are precisely the cohort that the LDP needs to win back to triumph at the next election. Takaichi’s successful handling of President Trump’s visit and her international debut at the ASEAN summit bodes well. Administration policy focuses on ways to cushion the pain from inflation; this includes removing the provisional tax on gasoline and introducing subsidies for electricity and gas costs. It discusses the possibility of income tax deductions, a refundable tax credit and the idea of making food and beverages exempt from consumption tax for a limited two-year period. To help pay for such possible measures it suggests a review of existing special tax measures and abolishing those deemed ineffective. In
terms of energy policy the administration will promote the restart of nuclear power plants and development of new ones. The document aims to strengthen deterrence through investment in Japan’s defence capabilities, and a move has already been made on this front with the decision to accelerate defence spending to 2% of GDP in the current fiscal year, two years earlier than planned. To address demographics they plan to abolish formal retirement ages and extend free high school tuition to fully encompass private schools. While the policy document makes no reference to monetary policy, Takaichi mentioned in her acceptance speech that the BOJ should cooperate with Government in supporting their macroeconomic aims suggesting that she expects the BOJ to retain a relatively dovish stance. The administration is pro-growth through fiscal expansion and has a hawkish stance towards national security. The policies seem likely to be good for the market, not just from the pro-growth agenda, but also from industrial policy and the promotion of reform. The FSA is currently formulating a revision to the corporate governance code focused on measures to encourage the efficient use of cash and discourage hoarding and asset inefficiency. This dovetails well with Takaichi’s reforming
instincts, she argued for a move to address this in a book published in 2021.

Fund

The fund rose by +6.54% (JPY share class) in October, outperforming the Topix (dividends reinvested) by 0.34%.

Sector allocation was the driver of the fund’s outperformance in October with stock selection marginally negative. The fund’s overweight in Semiconductors & Semiconductor Production Equipment was positive as global markets continued to bet on growth in AI spending and applications and this flowed through into Technology Hardware & Equipment where the fund is also overweight. Having no exposure in the Insurance and Transportation sectors also helped. The underweights in Capital Goods and Telecommunication Services were minor drags, as were the overweights in Financial Services and Banks as the Japanese market priced in a slightly more dovish and fiscally loose outlook following the election of Sanae Takaichi as prime minister.

Following on from strong performance in September, Ibiden was again the fund’s top performer. Shares have been rallying very strongly throughout the year driven by the boom in demand for AI data centres and components of which Ibiden is a key supplier and this continued in October. Performance was then boosted further after the sudden announcement of the exclusion of Nidec from the Nikkei 225 index and the inclusion of Ibiden which resulted in vast demand from index funds and proxies. Other stocks that outperformed were Fujitsu, Kawasaki Heavy Industries, GMO Payment Gateway and not owning semiconductor names Disco and Renesas. Stock selection was poor in semiconductors where the fund’s holdings in Screen Holdings and Sumco were a drag given their lower exposure to AI within the sector and not owning Advantest, the most AI geared name, and Kioxia. Not owning Softbank Group, which also rallied strongly on the AI theme, also hurt performance.

In October we sold two positions from the fund. The first of these was Sysmex, the medical device company where we have lost confidence in the company’s ability to recover sales momentum in China, a key market for them. We have reason to believe that on top of various government policies aimed at reducing overall medical expenses and certain areas of testing in China, price competition is also intensifying in the region. In such an environment and with government efforts likely to continue to ramp up we find it hard to have conviction in a recovery scenario for Sysmex and thus have decided to exit our position. We also sold the fund’s holding in Astroscale, a leading space company. Astroscale already have a strong position in the space industry thanks to their RPO technology which allows them to provide various services to satellite owners including government bodies, defence agencies and corporates. The company has inked deals with customers in the US, Japan and Europe but faces some delays in the short term which we think leaves little margin for error between now and a few years’ time when we expect them to become cashflow positive. After the election of Takaichi, who has espoused strong view with regard to Japan’s space capabilities, the stock rallied strongly and so
we have taken the opportunity to take profits and sell.