The following article is contributed by James Richter of Telos Asset Management Company.
The Japanese stock market is cheaper today than at the depths of the financial crisis. The country’s stocks trade at the lowest valuations in over twenty years.
Source: S&P Capital IQ.
Japan multiples include all listed stocks on the Tokyo Stock Exchange and JASDAQ with market cap over $50mm. TEV/LTM EBITDA multiplies on the first trading day of the year indicated.
Whether you look at price/earnings, book/equity, EV/EBITDA, across any quartile, Japan in 2017 is the cheapest market in the developed world.
Investors point to three primary reasons for pessimism about Japan: high debt to GDP, stagnant growth and poor capital allocation.
1. Japan’s government debt burden and Japanese monetary policy are a fair concern, however, we have seen a dramatic shift in this trend since 2014.
2. A stagnating economy is also a reasonable concern, however, the recent numbers are promising with unemployment at 22-year lows and business confidence indicators hitting an 18 month high in March.
3. Japanese corporate governance and capital allocation— also a fair concern, however, governance and capital return indicators have been markedly improving since the 90’s, and particularly since the great recession.
Summary
Despite extreme pessimism, we believe Japan’s economy is as healthy as any. Japanese profitability and business confidence are at highs and unemployment is at record lows. We struggle to see a reason why Japanese stocks should be trading at half the level of US stocks and at all-me lows for Japan in this millennium.
We do not see evidence of the catastrophically negative catalysts implied by current relative and absolute valuations. This is especially true when targeting the subset of Japanese equities where we believe such hypothetical negative catalysts are mitigated: growth agnostic, value-oriented, debt disciplined companies with less dependency on foreign exchange dynamics.
As Warren Buffet once explained “The most common cause of low prices is pessimism—sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism, but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.”
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