After many false dawns, maybe, at last, Japan represents a buying opportunity for global investors, as the equity market’s price:book ratio has slumped to 1.2 times – its lowest level in 40 years.
According to Martin Currie Investment Management’s Keith Donaldson, who heads up the manager’s Japan team, there are at last compelling reasons why investors should now consider a significant allocation to Japan.
“The four most dangerous words in the history of stock market investing are ‘this time it’s different’,” he said in a client note recently. “So I’ll preface what I’m going to say by looking back 12 months. In October 2007 we gave a presentation to investors in London titled ‘Why you shouldn’t invest in Japan’. It was a deliberately provocative title but reflected what we saw as the only rational position at the time… Despite being the world’s second-largest stock market, international investors have been underweight Japan for many years. Too many false dawns have bred a healthy scepticism about stories of Japan’s revival. Almost a year on and guess what? This time it’s looking very different…”
Donaldson lists five reasons for the turnaround in his firm’s views:
. Valuations are at historic lows – the price:book ratio of 1.2 times is the lowest for 40 years. Corporate profitability has been rising for five years, profit margins are at record levels and companies have been buying back their shares.
. A weaker yen and lower commodity prices will boost exports – the strengthening US dollar and lower commodity prices since July are good news for Japan.
. Dividend yield is higher than the bond yield – companies have been increasing their payouts due to the new focus on shareholder value.
. Japanese companies are “stronger” than their western counterparts – they have strong cash flows, are relatively lightly geared and have been buying cheap Western assets.
. Japan is an ideal environment for stock pickers – the market still has many inefficiencies, including domestic buyers who are highly thematic and with significant ‘herding’ by analysts. M&A activity and private equity are beginning to exploit the inefficiencies.