While the strong yen and the European crisis continue to pose challenges, Invesco’s investment professionals are quite positive about the long-term prospects for Japanese equities, says Kunihiko Sugio, CIO & Chief Portfolio Manager at Invesco Japan…
Today, Japanese equities appear to be extraordinarily cheap, trading at an average P/B of 1.0x, an average P/E of 13-14x, and offering an average dividend yield of 2.1%-2.2%, compared to a 10-year government bond yield of just 1%. Of about 3,600 listed companies in Japan, more than 60% are trading below their book values, with numerous global leaders being among them.
I see the structural changes in Japanese corporations as not only continuing, but actually gaining momentum. Companies are growing their business outside Japan and have trimmed their cost structures by selling non-core assets and focusing on competitive core businesses. Thus, Japanese companies are becoming well-positioned to achieve a higher return on equity even with only a small increase in revenues. “This may lead to a revaluation of the currently cheap Japanese stocks. Until now they have been shunned by foreign investors due especially to their comparatively low return on equity. Based on Nomura’s estimates for 2012, Japanese earnings growth is expected to be by far the strongest among the major regions at 36.6%, compared to 6.0% for the US, 3.5% for Continental Europe and 10.0% for Asia ex-Japan. And that is not factoring in a possible depreciation of the yen which leaves some room for upward revisions.
Meanwhile, Invesco’s Japanese experts project a V-shaped recovery for the Japanese economy. While a strong capital expenditure boom looks likely as the delayed equipment replacement cycle kicks in, the Bank of Japan’s expansive monetary policy provides reason to hope that the yen will continue to depreciate. More than anything, growth will be driven by four huge supplementary budgets that will see investments corresponding to about 4% of Japanese GDP aimed at rebuilding damaged infrastructures, supporting people affected by the earthquake and promoting new economic initiatives. As a result, Invesco’s investment professionals believe the Japanese economy could grow by 2% or more this year, more than most other developed nations.
In 2011, a terrible year for Japan and a dismal year for its economy, the Topix and Nikkei 225 indices plummeted, underperforming global peers such as the S&P 500, the NASDAQ and even some European markets. Today we believe Japan offers a whole host of attractive investment opportunities. Corporate fundamentals are strong, the macro picture is favourable and the yen is weakening. Against this backcloth, we think there are good arguments for considering investment in Japanese equities.