Alma Eikoh Japan Large Cap Equity Fund

Market Review and Outlook

The Topix rose +1.4% in November, posting the 8th consecutive month of gains as the majority of index constituents reported first half results which were on average well received by the market. One of the major themes over the month was the reversal in share price performance of generative AI related stocks which rallied aggressively in October. Softbank Group, Advantest and others fell sharply and given their index weightings in the Nikkei, the Nikkei 225 fell 4.1% almost taking the Nikkei Topix ratio back to the level of end September. Two other major pieces of news that drove stock market performance over the month were the economic stimulus package of the new Takaiichi administration and response of China to comments made by Takaiichi regarding the defence of Taiwan. On November the 7th, Takaiichi mentioned that a hypothetical Chinese attack on Taiwan could constitute a ‘survival-threatening situation’ for Japan which would in turn justify a military intervention from the Japanese. The Chinese administration reacted strongly to this both through their rhetoric and then by advising Chinese citizens
to avoid travel to Japan as well as suspending imports of Japanese seafood products. This had a negative impact on market sentiment, especially towards more China-geared stocks. Later in the month however, there was more positive news for the market as expectations for a Fed rate cut increased and simultaneously expectations for a BOJ rate hike in December also increased which supported financial stocks. The market was also buoyed by the approval by the cabinet of the new administration’s economic package and the supplementary budget. The three main target areas of the budget are rising prices, investing for growth in the economy and strengthening Japan’s defense and diplomacy. Specific policies include raising annual income tax thresholds, scrapping provisional gasoline taxes and expansion in support for local governments and households with children. The commitment to spend 2% of GDP on defence will be brought forward from FY27 to FY25 with further growth expected over the next few years. The overall stimulus measures total Y21.3tn with Y17.7tn in spending and Y2.7tn in tax cuts. Last
year’s spending budget was Y13.9tn for context so this represents a significant expansion however the overall fiscal impact is harder to gauge due to larger than planned tax revenues and unused budget allocations. In reaction to the probability of the overall fiscal deficit widening again after several years in a row of tightening led to a weakening of the Yen and Japanese Government Bonds. The Yen finished the month at Y/$ 156.2 and the yield on the 10-year JGB hit a new high of 1.81%.

The domestic economic situation in Japan continues to remain reasonably stable with the All Japan CPI ex-Fresh Food coming in at 3.0%, in line with consensus, and the Economy Watchers Survey continuing to improve with the current conditions index at 49.1 and the future conditions index at 53.1. Machinery orders and October Industrial production numbers also improved month on month and beat expectations. The economy should see real wage growth continue in 2026 in the light of expected wage increases of around 5% for 2026, after two years of similar gain, with core inflation running smoothly at around 3%. This is allowing the Bank of Japan to continue its path to monetary policy normalisation and for companies to continue to invest for growth and pass on cost pressures. The first half results reported by Topix companies in aggregate showed net earnings growth of around +7% ex Financials and +9.4% including financials with overall company forecasts being upped by +3% on aggregate. The AI theme continues to be the major driver of market sentiment and growth for the global economy but after a very strong run so far this year, investors are re-assessing appropriate valuation levels. We continue to focus on both fundamentals and valuations and have reduced some of our exposure to this theme whilst continuing to manage a portfolio that aims to balance both defensive and cyclical stocks. The fund’s largest overweights are Tech Hardware, Financial Servies, Semiconductors and Healthcare with the largest underweights in Capital Goods, Insurance and Media.

Fund

The fund fell by -0.60% (JPY share class) in November, underperforming the Topix (dividends reinvested) by -2.03%.

Both sector allocation and stock selection negatively impacted relative fund performance in November, with stock selection accounting for the larger share at approximately 70% of the total. The fund’s overweight in Semiconductors & Semiconductor Production Equipment was the main drag on performance as the market reassessed valuations of stocks exposed to AI capital spending after the strong rally in the prior month. This also spilled over into Technology Hardware & Equipment, where the fund is overweight, particularly through component maker Ibiden, a key packaging supplier for Nvidia’s AI GPUs. This was only partly offset by the fund’s gain from its underweight in Telecommunication Services where SoftBank Group, an investor in OpenAI, also performed poorly. This environment also led to a clear outperformance of ‘value’ stocks over ‘growth’, reversing October’s pattern. Defensive names benefitted under this backdrop, leaving the overall impact to the fund broadly neutral: positive contributions from the fund’s overweights in Financial Services and Pharmaceuticals, Biotechnology & Life Sciences were offset by the underweights in Consumer Staples Distribution & Retail, Utilities, and Energy.

At the stock level, the best performer was construction company Shimizu which continued its strong performance this year; the supply demand environment domestically remains very tight, and order profitability is rising healthily. The fund’s relatively new position in KDDI outperformed after posting a solid set of first half results and a positive outlook including hopes for a turnaround in mobile ARPU which has been in decline for several years in the wake of the Suga administration’s pressure on the sector. GMO Payment Gateway, Japan’s dominant payment processing company also rose sharply after strong results and a better than expected forecast reassured the market of their growth prospects. Air-conditioner maker Daikin outperformed after its results and not owning Softbank Group helped the fund as shares retraced after a very strong October. On the other hand, Socionext fell sharply after announcing a set of results that showed weaker profitability on some of the large contracts they are working through this year and prospects for a material recovery in profitability look to be delayed beyond the next 2 to 3 years or so. Ibiden, the packaging maker geared to Nvidia which has been one of the best performing stocks in the Topix year-to-date, fell along with other AI related names and
the wafer maker Sumco also fell after guiding for a tougher environment than was expected heading into 2026. Medical data company JMDC fell though on no specific news and Kawasaki Heavy Industries was also weak after a strong run in October.

In the wake of the results announcement by Socionext, the SOC designer, we decided to sell the fund’s position. The revelation that the current book of contracts is at a lower level of profitability than expected, and that the outlook for a material improvement in margins will likely be delayed to 2028 or beyond changes our upside for the stock significantly and renders it no longer attractive. We also decided to sell the fund’s position in the pharmaceutical company Takeda and to invest the proceeds in adding to the position held in Daiichi Sankyo. Takeda’s core drug, Entyvio, is not growing quite as quickly as expected and though we remain positive on the prospects of the late-stage pipeline drugs Tak-279 and Tak-861 we don’t think the stock offers as attractive a risk reward/profile as Daiichi Sankyo. We have strong hopes for continued growth of the Enhertu franchise at Daiichi and expect the market to re-evaluate the potentially enormous market opportunity for Datroway in the coming years. We also purchased a position in the industrial conglomerate Hitachi where we think the quality and longer term outlook of the energy business remains underappreciated by the market. Hitachi’s grid business is already a global leading player and with the immense requirements for increased scale and
complexity in power grids as a result of further electrification, more renewable energy sources and now demand for AI data centres too, prospects are very bright.