Japanese Equity Fund

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Overview

Manager's Outlook

Japanese equities are in the middle of the road at this stage; Japan is among the most open and cyclical markets. If the global economy, and particularly the U.S., has a hard landing or tips into recession, then that will be a headwind for Japanese equities. However, the TOPIX Index is on little over 12x forward earnings when it trades on average around 14x forward earnings. Therefore, much of that bad news and negative sentiment is already reflected in valuations.

The yen has also fallen precipitously in 2022, due to the significant divergence of Japan's inflation trends and central bank policy from other developed nations. This is important for two reasons: (1) the market is very attractive for foreign investors looking for cheap assets and (2) the weak currency is supportive for Japan's exporters, which represent a large part of the TOPIX and have become around 20% more competitive in 2022. These exporters are mainly the large-cap value names, while the sluggish currency has further compounded pressure on small-cap and growth investors.

The Japanese currency is at its lowest level in around 24 years versus the U.S. dollar?we believe that we are likely to see the yen strengthening from here at some point, particularly if inflation in the U.S. starts to roll over while remaining tepid and in line with the central bank's target in Japan. We also note that the currency can move sharply; in 1998, the yen rallied by about 22% in less than three months, with about a third of the gains in over just two trading days. The currency can rally sharply from its current lows and that would be supportive for the relative performance of small-cap and growth investors who have been under pressure. Small-caps are at their biggest discount relative to large-caps since the global financial crisis?that is excessive, in our view.

Despite the uncertainty in the global economy at the moment, Japan's corporates continue to buy back stock and return capital to shareholders at record levels. This is a very encouraging sign about the health of the corporates, as well as signaling the ongoing improvement in corporate governance at the company level in Japan. We believe the relentless pressure of late creates opportunity for long-term investors.

Strategy

Fund Summary

With close proximity to, and a deep understanding of, the companies in which they invest, our Tokyo-based investment team searches for companies with a focus on growth and improvement. We favour businesses with sustainable growth, a durable competitive advantage, robust fundamentals and a credible management team. The promotion of environmental and/or social characteristics is achieved through the fund's commitment to maintain at least 10% of the value of its portfolio invested in Sustainable Investments, as defined by the SFDR. Additionally, we apply a proprietary responsible screen (exclusion list). The manager is not constrained by the fund’s benchmark, which is used for performance comparison purposes only.

Investment Association Sector

Global

30-Sep-2022 - Archibald Ciganer, Portfolio Manager,

Our largest allocation on a relative and absolute basis continued to be in the IT and services sector. Other major overweight allocations include machinery and retail trade. In contrast, we remained underweight in electric appliances and precision instruments, commercial and wholesale trade, banks, and food. During the quarter, we continued to make adjustments at the margin to reduce the portfolio's cyclical exposure due to concerns about slowing growth, and we added some of the more defensive holdings, including in the large-cap space.

IT and Services

We remain constructive about IT and services. We believe there is scope for improving earnings in IT companies while valuations also look attractive; services stand to benefit as growth recovers. Signs of a tightening labor market are a key positive for services and one of the major themes in our current positioning. That said, we reduced some of our holdings in IT and services over the review period with a view to managing portfolio risk.

We decided to close our position in Recruit Holdings, a leading human resources services company and major global player in temporary staffing. The business has exposure to the U.S. market through Indeed, and our conviction has lessened somewhat on concerns surrounding the risks to the U.S. jobs market.
We exited our holding in KDDI, a leading mobile carrier, after its strong share price performance this year. The stock has outperformed many of its peers over the year, but we believe the fundamentals look weaker relative to Nippon Telegraph and Telephone (NTT), which we hold. NTT is a high-quality telecommunications company with a solid balance sheet. It offers defensive earnings from dominant market share in Japan in both fixed-line and mobile amid rising macroeconomic uncertainty.
In contrast, we added to our holding in Visional, which we regard as one of the most attractive companies in the services sector currently. It operates BizReach, a digital platform matching professional job seekers with employers and recruiters. We expect the recruitment platform's growth to reaccelerate as Japan's economy normalizes.

Retail Trade

We found some attractive opportunities to invest in the retail trade sector, where we are overweight versus the benchmark. The sector has benefited from the lifting of domestic coronavirus restrictions and, in our view, has the potential to be further boosted by the continued opening of Japan's borders to tourism.

Seven & I is a leading retail conglomerate. We believe the company's acquisition of U.S. convenience store chain Speedway solidifies its subsidiary 7-Eleven's leadership in the North American market and will transform the group by (1) sharply increasing the proportion of earnings from a high-return operation with real growth potential, (2) raising return on equity via leverage, and (3) incentivizing reform in Japan of underperforming assets.
We trimmed our position in leading drugstore chain MatsukiyoCocokara and discount retailer Pan Pacific International after the strong run in their share prices. Optimism about the reopening of the economy boosted both companies.

Electrical Appliances and Precision Instruments

While we have a below-benchmark position in the sector, it is one of our largest exposures on an absolute basis and we own some compelling opportunities in this space.

We added a position in Olympus, a Japanese medical technology company and leader of gastrointestinal endoscopes with significant global market share. We believe Olympus can deliver higher-than-consensus earnings as the market underappreciates its potential of core endoscope business sustainability and health care portfolio rationalization.
Shimadzu is a life science tool company. In our view, it is a long-term growth compounder with strong tailwinds from increased demands of health care spending and drug production in Asia. We took advantage of recent weakness in its share price to add to our holding.
In contrast, we sold out of our position in Tokyo Electron, a leading semiconductor company. We prefer to own this stock when we believe we have reached the bottom of the semiconductor cycle.

Transportation and Logistics

We have maintained an underweight allocation to the transportation and logistics sector. We believe that industry dynamics are challenged amid rife competition and that autonomous and electric vehicles pose a threat to demand. The rationales for the stocks that we hold are idiosyncratic. That said, we took the decision to add a sole position.

We initiated a position in East Japan Railway, which operates conventional and bullet train services as well as retail businesses in the Tokyo and northern Japan areas. We believe profits can recover from post-Covid normalization and increasing domestic and international travel.

Team

Archibald Ciganer,
Portfolio Manager

Archibald Ciganer is the portfolio manager for the Japan Equity Strategy, having previously covered the telecom, transportation, utility, media and consumer sectors as a research analyst in the Equity Division.

Portfolio Manager since

2013

Years at
T. Rowe Price

Years investment experience

Laurence Taylor,
Portfolio Specialist

Laurence Taylor is a portfolio specialist in the Equity Division at T. Rowe Price, representing the firm's global equity portfolio managers to institutional clients, consultants and prospects.

Years at
T. Rowe Price

Years investment experience

Indicative Benchmark Data Source: Tokyo Stock Exchange

Past performance is not a reliable indicator of future performance.

Source for performance: T. Rowe Price. Fund performance is calculated using the official NAV with dividends reinvested, if any. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested. It will be affected by changes in the exchange rate between the base currency of the fund and the subscription currency, if different. Sales charges (up to a maximum of 5% for the A Class), taxes and other locally applied costs have not been deducted and if applicable, they will reduce the performance figures.

Daily performance data is based on the latest available NAV.

The Funds are sub-funds of the T. Rowe Price Funds SICAV, a Luxembourg investment company with variable capital which is registered with Commission de Surveillance du Secteur Financier and which qualifies as an undertaking for collective investment in transferable securities (“UCITS”). Full details of the objectives, investment policies and risks are located in the prospectus which is available with the key investor information documents and/or key information document (KID) in English and in an official language of the jurisdictions in which the Funds are registered for public sale, together with the articles of incorporation and the annual and semi-annual reports (together “Fund Documents”). Any decision to invest should be made on the basis of the Fund Documents which are available free of charge from the local representative, local information/paying agent or from authorised distributors. They can also be found along with a summary of investor rights in English at www.troweprice.com. The Management Company reserves the right to terminate marketing arrangements.

Please note that the Fund typically has a risk of high volatility.

Hedged share classes (denoted by 'h') utilise investment techniques to mitigate currency risk between the underlying investment currency(ies) of the fund and the currency of the hedged share class. The costs of doing so will be borne by the share class and there is no guarantee that such hedging will be effective.

The specific securities identified and described in this website do not represent all of the securities purchased, sold, or recommended for the sub-fund and no assumptions should be made that the securities identified and discussed were or will be profitable.

Attribution Data: Analysis represents the total performance of the portfolio as calculated by the FactSet attribution model and is inclusive of other assets that that will not receive a classification assignment in the detailed structure shown. Returns will not match official T. Rowe Price performance because FactSet uses different exchange rate sources and does not capture intra-day trading. Performance for each security is obtained in the local currency and, if necessary, is converted to U.S. dollars using an exchange rate determined by an independent third party. Figures are shown with gross dividends reinvested.

Sources: Copyright © 2020 FactSet Research Systems Inc. All rights reserved. FT Interactive, IDC; Analysis by T. Rowe Price Associates, Inc. T. Rowe Price uses the TOPIX sectors and industries for sector and industry reporting for this product.

A full list of the currently issued Share Classes including Distributing, Hedged, and Accumulating Categories may be obtained, free of charge and upon request, from the registered office of the Company.

©2023 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

Citywire Data Source: Citywire – where the fund manager is rated by Citywire, the rating is based on the manager’s 3-year risk adjusted performance. For further information on ratings methodology, please visit www.aboutcitywire.com.

IT and Services

Retail Trade

Electrical Appliances and Precision Instruments

Transportation and Logistics

Risks

Typical Investor

Commentary for