Mark Dampier: After 20-year bear market Japan is looking cheap
Saturday 26 November 2011
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
Will your credit card rewards be scrapped following new EU rules on charges?
Buyers beware of new-build home headaches
What would happen if you put a statistician in a casino with £1m?
Simon Read: 'The fight must go on over equality on expat pensions'
Pension freedoms: How to deal with cold calls from scammers
- 1 I've been called an abusive and dangerous parent, when all I did was listen to my transgender child
- 2 Why this father didn’t hide his daughter’s heroin overdose in her obituary
- 3 Smartphones are making children borderline autistic, says psychiatrist
- 4 Company breaks open Apple Watch to discover what it says is 'planned obsolescence'
- 5 Teaching profession headed for crisis as numbers continue to drop and working lives become 'unbearable'
The sickening truth about food banks that the Tories don't want you to know
Migrant boat disaster: Ukip candidate mocks victims in sickening Twitter post
Nigel Farage wants the BBC to stop making programmes like Doctor Who, Strictly Come Dancing, and Top Gear
Global warming: Scientists say temperatures could rise by 6C by 2100 and call for action ahead of UN meeting in Paris
Rupert Murdoch berated Sun journalists for not doing enough to attack Ed Miliband and stop him winning the general election
General Election 2015: Britain would become a 'communist dictatorship' under Ed Miliband and Nicola Sturgeon, claims wife of Michael Gove
iJobs Money & Business
£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...
£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...
£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...
£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...
Day In a Page
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms