James SullivanThe ‘widow maker’ trade was to short Japanese bonds. A generation of investors believed the bond market was irrationally expensive, and they may be right one day, but the ‘greater fool’ theory is a powerful one.

Instead of wasting too much energy on whether prices across the asset class spectrum are irrationally expensive, we have focussed more on where we believe prices are irrationally cheap. The by-product of this approach tends to avoid momentum driven participation, and permits a greater focus on managing the downside risk paired with potentially significant upside when the market revaluates risk and reward.

This isn’t a blog about ‘value versus growth’, a subject matter most of us are beyond debating. This is about investing in solid companies and good themes that trade below or close to their intrinsic value. How one pigeon holes such companies, is largely irrelevant.

Take Japan as a case in point. Japan’s slow and steady corporate evolution appears to be largely unrecognised or rewarded by the market.

Despite dividends and share buybacks continuing to surpass previous highs and Earnings Per Share (EPS) growth of 82% since the start of 2015 (beating the S&P growth rate of 69%) only calendar year 2017 witnessed (modest) positive flows from overseas investors.

Year to date the TOPIX is up just 5.2% (in yen), compared to the S&P that has appreciated 21.5% (in dollars). This, however, is not representative of underlying earnings. EPS growth has in fact been almost identical, circa +22% in both cases.

The apathy towards the Japanese market is quite something.

Toda Corporation, for example. Toda is a general construction company specialising in schools and hospitals. Despite quadrupling dividends in the last 5 years, and yielding 3.9%, it trades at 70% of tangible book value and is on a P/E multiple of 7.5x. In fact, Toda even trades at a discount to its own balance sheet.

With the TOPIX yielding 2.5% and a forward price earnings ratio consistently lower than at any point during the past 20 years, Toda is far from an isolated example.

There remains room for much improvement, but pair the bottom up data with the top down macro observations and the story becomes more compelling.

In the 10 years before Abe’s 2012 appointment, nominal GDP averaged at -0.4%, and since then a positive figure has been posted every year. It is unlikely the BoJ will hit its “above 2%” inflation target anytime soon, but an upward trajectory has been witnessed and has been stable around 1% for a few years, which is no mean feat. The labour market is very tight with unemployment at 2.4% , yet admittedly there remains the challenge to convert this into wage growth. However, what has been, and may continue to be, a tailwind, is the real effective exchange rate of the Yen, close to 77, which is notably cheap relative to history. With the dollar trading close to its 10 year high, this is potentially the ace in the pack.

This isn’t meant to be about comparing Japan with the US, but it does help contextualise the status of the Japanese market, whilst going some way to rationalise why we allocate a grown up percentage of our risk budget to Japanese equities.

Address

MitonOptimal UK Limited
Royal Mead
Railway Place
Bath
BA1 1SR
UK

Phone

t: +44 (0) 1225 632 250
f: +44 (0) 1225 439 442

Regulatory Information

MitonOptimal UK Limited is part of the MitonOptimal group of companies. Registered in England and Wales No. 09138865. Authorised and regulated by the Financial Conduct Authority.

Send this to a friend

Terms & Conditions

TERMS & CONDITIONS

By using or accessing any part of our website, aside from the Terms and Conditions page, you agree to be legally bound by those terms and conditions. We may amend these terms and conditions at any time without notice. Your continued use of our website following any change will constitute your acceptance of such change. Our full terms and conditions can be found at https://www.mitonoptimal.com/uk/terms-conditions/

Regulatory Information

The MitonOptimal Group (“MitonOptimal”) of companies is authorised and regulated in their respective jurisdictions, as required by law. For further details, you may visit the regional sites via https://www.mitonoptimal.com.

MitonOptimal UK Limited is part of the MitonOptimal group of companies. MitonOptimal UK Limited is registered in England and Wales No. 09138865. Authorised and regulated by the Financial Conduct Authority.

Risk Warning

Potential investors should be aware that our models and funds may make investments in equities, bonds, cash, commodities alternative strategies and commercial property. Investors should be aware that there is no guarantee that investments will go up.  Past performance is no guide as to future performance. As the price of units and the amount of income distributed or accumulated may go down as well as up, the Manager has no obligation to redeem units at the subscription price originally paid. If you are in any doubt about the content of these terms and conditions, you should not enter the site and consult your stockbroker, bank manager, solicitor, accountant or professional investment advisors.

If you have any questions or concerns about our website please email us at [email protected].

Please indicate below, whether you accept/do not accept our terms and conditions of use.