Foreign investors too negative on Japanese equities

Oct 23, 2018
Fund manager says sell-off ignores market’s opportunities

Foreign investors underestimate the return on Japanese equities after selling more assets in 2018 than at any other time in the past two decades, according to a statement by UK investment management firm Kames Capital.

Markets have turned bearish on the country’s stocks as fears of a global trade war intensify, pulling the TOPIX Index down 3.1 percent despite attractive earnings and valuations.

‘Ben Graham famously observed that the stock market gets too excited and too depressed, and the same is true of foreigners investing in Japan. Because the change has been gradual it’s been frustrating, but when Japan is out of favor it’s usually time to buy,’ comments Robin Black, support manager for the Kames Global Equity Income Fund.

The TOPIX Index fell 9 percent from a peak in January this year as investors grew weary of the vulnerability of Japan’s trade surplus with the US to protectionist policies of the Trump administration. The yen has since strengthened from resulting global trade tensions, making Japanese exporters less competitive and causing investors to pull back from the equities market.

According to Black, the current selling spree leaves opportunities for a 13-times price-to-earnings ratio, including 13-times book value. He says two changes account for the negative sentiment: first, the Bank of Japan – which for much of 2016 operated a negative interest rate policy – recently engineered rates on 10-year bonds down toward zero.

Black says the move is ‘remarkably bold for a conservative body such as the Bank of Japan’, which has historically feared inflation and faced pressured by the country’s politically connected banks, which oppose low rates.

The second change is the spending behavior of companies, which have started to raise dividends in contrast to their usual practice of hoarding cash. Tire manufacturer Bridgestone, for instance, has doubled its payout over the past five years.

‘Japan’s return on equity is similar to Europe and profit margins are more than double where they were in the 1990s,’ Black concludes.

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