Mark Dampier: After 20-year bear market Japan is looking cheap

 

The world's financial markets are fixated on the issues of European sovereign debt. The inability of politicians to get a grip of the situation is allowing markets to dictate the pace as a series of countries fall into the spotlight: Greece, Italy, and now Spain. However, on the other side of the world there is another highly indebted country whose bonds are seen as something of a safe haven, and whose equity market is the cheapest it has been for over 20 years. That country is Japan.

A 20-year bear market has left both domestic and international investors very light in Japan's equity market. Yet there is now good reason to take a second look. On a dividend yield basis, price-to-book basis and, in many cases, a price-to-earnings basis, it is an area that has probably never looked as cheap.

Japanese investors, scarred by two decades of dire returns, have largely chosen to ignore it. In an environment of very low inflation (and periods of deflation) they have been content buying low-yielding Japanese government bonds (JGBs). However, increasing dividends may reignite their interest. Scott McGlashan and Ruth Nash, managers of JO Hambro Japan Fund, are finding a large number of stocks yielding more than 3 per cent, far higher than the yield on 10-year JGBs of just over 1 per cent, and if Japanese investors are enticed into the market by these yields, the effects could be profound.

The managers believe the forthcoming interim results season could provide further impetus. They are confident many companies they own will beat forecasts and use the cash on their balance sheets to either hike dividends or announce share buybacks, a continuation of the recent trend. For instance one holding in the fund, Eizo Nanao, which makes LCD screens for medical devices and (oddly enough) pinball machines, announced a 4.5 per cent share buy-back in September, prompting a significant rally.

Scott McGlashan and Ruth Nash also note that many companies announced their intention to increase dividends at an earlier point in this financial year, an indication of growing confidence. Another interesting trend is that of management buyouts (MBOs). There have been 16 Japanese listed companies acquired via MBO in 2011 at an average premium of nearly 50 per cent to market value at the time, illustrating that company management see considerable value in Japanese firms even if investors don't.

Recently, manufacturing firms have been the poorest performers in Japan due to concerns that exports will slow as global growth weakens. Holdings such as Nitto Denko and NGK have therefore weighed on returns. However, positions in retail stocks such as J Front Retailing, Aoyama Trading and Seven & I have had a beneficial effect, drawing on the recent unexpected strength of retail sales. Far from reeling in the aftermath of the tsunami in March, the Japanese consumer has been loosening the purse strings and the retail sector has been a bright spot in the market.

Clearly events outside Japan such as problems in the eurozone or further slowing of global economic growth could derail any revival. However, disappointment at a corporate level is already factored into Japanese shares. On the whole they are priced as "value destroyers" rather than "value creators", meaning any good news could have a considerable positive effect on the market, and with Japan well-placed geographically (60 per cent of its exports are to Asia), the prospects for many Japanese companies are bright if they can seize the opportunity.

One possible stumbling block for UK investors is a weakening of the yen, which would potentially erode returns in sterling terms. This has been foretold for as many years as I can remember, proving several top economists and fund managers wrong along the way by remaining stubbornly strong. Perhaps at some point it will weaken, but if it does it would probably be more than compensated for by a sharp movement in the Japanese equity market as exporters suddenly become more competitive. As far as the domestic economy is concerned I don't think Japan is going bust any time soon. The vast majority of the debt is held by Japanese investors rather than foreign ones, so unlike European nations its fate is in its own hands – and not at the whim of the international bond markets.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Voices
Homeless Veterans charity auction: Cook with Angela Hartnett and Neil Borthwick at Merchants Tavern
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm tomorrow
Arts and Entertainment
J Jefferson Farjeon at home in 1953
booksBooksellers say readers are turning away from modern thrillers and back to golden age of crime writing
Sport
Amir Khan is engaged in a broader battle than attempting to win a fight with Floyd Mayweather
boxing Exclusive: Amir Khan reveals plans to travel to Pakistan
News
Stacey Dooley was the only woman to be nominated in last month’s Grierson awards
mediaClare Balding and Davina McCall among those overlooked for Grierson awards
PROMOTED VIDEO
Voices
Joseph Kynaston Reeves arguing with Russell Brand outside the RBS’s London offices on Friday
voicesDJ Taylor: The great tradition of St Paul and Zola reached its nadir with a worker's rant to Russell Brand
News
Twitchers see things differently, depending on their gender
scienceNew study shows that birdwatching men have a lot in common with their feathered friends...
News
i100
Arts and Entertainment
Caroline Flack became the tenth winner of Strictly Come Dancing
tvReview: 'Absolutely phenomenal' Xtra Factor presenter wins Strictly Come Dancing final
Life and Style
A still from the 1939 film version of Margaret Mitchell's 'Gone with the Wind'
life
News
Xander van der Burgt, at the Royal Botanic Gardens, Kew
scienceA Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
Arts and Entertainment
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer
film
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

    $200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

    Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

    $125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

    Sheridan Maine: Commercial Finance Manager

    Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Sheridan Maine: Regulatory Reporting Accountant

    Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Day In a Page

    The week Hollywood got scared and had to grow up a bit

    The week Hollywood got scared and had to grow up a bit

    Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

    Panto dames: before and after

    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
    Thirties murder mystery novel is surprise runaway Christmas hit

    Thirties murder mystery novel is surprise runaway Christmas hit

    Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
    Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

    Anne-Marie Huby: 'Charities deserve the best'

    Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
    The botanist who hunts for giant trees at Kew Gardens

    The man who hunts giants

    A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
    The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

    The 12 ways of Christmas

    We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
    Birdwatching men have a lot in common with their feathered friends, new study shows

    The male exhibits strange behaviour

    A new study shows that birdwatching men have a lot in common with their feathered friends...
    Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

    Famous diaries: Christmas week in history

    Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
    From noble to narky, the fall of the open letter

    From noble to narky, the fall of the open letter

    The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
    A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

    A Christmas ghost story by Alison Moore

    The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'
    Marian Keyes: The author on her pre-approved Christmas, true love's parking implications and living in the moment

    Marian Keyes

    The author on her pre-approved Christmas, true love's parking implications and living in the moment
    Bill Granger recipes: Our chef creates an Italian-inspired fish feast for Christmas Eve

    Bill Granger's Christmas Eve fish feast

    Bill's Italian friends introduced him to the Roman Catholic custom of a lavish fish supper on Christmas Eve. Here, he gives the tradition his own spin…
    Liverpool vs Arsenal: Brendan Rodgers is fighting for his reputation

    Rodgers fights for his reputation

    Liverpool manager tries to stay on his feet despite waves of criticism
    Amir Khan: 'The Taliban can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'

    Amir Khan attacks the Taliban

    'They can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'
    Michael Calvin: Sepp Blatter is my man of the year in sport. Bring on 2015, quick

    Michael Calvin's Last Word

    Sepp Blatter is my man of the year in sport. Bring on 2015, quick