When I first started to take a strong interest in the stock market in the mid-1980s, Japanese equities were the star performers. This outperformance continued until the end of the decade. Japan has hailed as a miracle economy and growth expectations were extremely strong. Numerous companies, particularly property companies and financial companies, traded at absurd earnings and cashflow multiples.
Fast forward 10 years to the mid-1990s when I started doing quant factor research in Asia at Macquarie Bank. By this time, Japanese equities had fallen sharply and was continuing to underperform regional equity markets. Japan also stood out as the one market in the region where value factors were generating the most alpha. The relative outperformance of value factors continued for many years until recently. Over the last 5 years, value factors have performed particularly poorly in Japan.
It’s hard to know why there has been such a marked regime shift in Japan. BOJ market interventions which resulted in the central bank driving down bond yields and becoming a substantial shareholder in many companies, have distorted financial markets and probably contributed to the shift.
This year, value factors have started to generate alpha again in Japan. Nevertheless, I am still amazed at the value anomalies that persist in this market. For example, there are a large number of stocks that look cheap relative to:
Net Assets: More than 25% of the more than 1,000 stocks in the Fund’s Japanese stock universe have a last reported book yield greater than 100% (ie they trade at less than their reported net asset value).
Enterprise Value: Over 10% of stocks in the Fund’s Japanese universe have net cash holdings which exceed 25% of each stock’s market capitalisation. And more than 16% of stocks have a last reported EBIT which exceeds 10% of each stock’s enterprise value.
No other large developed equities market comes close to matching these statistics.
At the other end of the value spectrum, there are numerous stocks in Japan which look expensive based on any valuation measure and are extremely expensive relative to regional and global peers. Stock specific examples are included in the following table. (Note: the table includes simple value ratios for illustrative purposes; the Fund’s stock selection process includes more sophisticated value factors).
Table 1: Expensive Stock Examples in Japan
Source: OQ Funds Management
There are many reasons which justifiably explain why some stocks are expensive and others are relatively cheap, including structural challenges, regulatory risks, and governance concerns. However, even after allowing for these issues, the value spreads in Japan are extreme.
These anomalies will not persist indefinitely. When they unwind, there will be great alpha generation opportunities for a robust investment process that exploits factor driven mispricing opportunities. This augurs well for the Fund’s future performance in Japan.
Comentarios