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Fund managers question if Japan still offers value


The Nikkei 225 rose almost 80 per cent between November and May, with the index soaring above 15,000 for the first time since 2008.

But suggestions that the Federal Reserve may slow its quantitative programme then caused a sharp sell-off in Japanese stocks.

Regardless of day-to-day trading, the sheer pace of the rise in Japanese equity markets has caused some commentators to question how long the country will represent good value.

Capital Economics’ analysis of the price/earnings of the Nikkei 225 relative to its long-run average indicates the market may be overvalued. The group recently warned “the valuation case for Japanese equities now seems far from compelling”.

Psigma chief investment officer Tom Becket made an early decision to reduce allocations to Japanese exporters and short the yen, saying it has become much harder to gauge what price is being paid for Japanese stocks since the market has “gone parabolic”.

Becket says valuations are “neither cheap or expensive”, at around 14 or 15-times earnings.

“But this is no longer an ‘asymmetric’ trade and risks have grown as the market has recovered,” he adds. “That being said, we expect earnings to continue to rise in the years ahead, as the Japanese economy continues to heal with the hyperactive Abe-san and Kuroda-san on the bridge.”

Becket: Made early decision to reduce allocations to Japanese exporters

Rathbones multi-manager David Coombs sees the rise in valuations as reason enough to maintain a distance from Japan.

He says: “Since March, Japanese equity valuations are up over 30 per cent following action by the Bank of Japan to tackle the strong yen.

“For that reason, we believe now is not the right time to access Japan, as there is room for disappointment and a fall in price. The cyclical outlook for the economy looks improved, but we believe it is far too premature to make a similar claim for the structural outlook and, by extension, the long-term investment case.”

Artemis Global Select fund manager Simon Edelsten argues alternatively that valuations of around 15-times are “hardly expensive” when you consider other factors.

He highlights Japan’s largest pump company Ebara, which saw its share price rise 50 per cent in a month. He says: “This is exactly the sort of example where you would be concerned that it was now looking expensive.

“However Ebara has actually revised up its guidance once already since we have owned it and it has hinted again it is going to be more than this. For this year, UBS has Ebara trading on 15-times and 12-times earnings for 2014. So it is up 50 per cent, but as you can tell from those price/earnings, this is hardly expensive.”

By contrast, the rise in share price in other instances has prompted Edelsten to take profits. He points to Japanese chemical company Shin-Etsu, which he sold recently after the share price also rose by 50 per cent.

Edelston: Says valuations of around 15-times are “hardly expensive”

He says: “When we bought Shin-Etsu the share price was around half the asset value of the company. However clearly if you get a 50 per cent move quickly then that discount on the asset disappears very rapidly, so we moved on to other things.”

Yellowtail Financial Planning managing director Dennis Hall says: “I thought there were good noises coming out saying that the Japanese market had potentially further to run with all the stimulus, but whether it will carry on we do not know so we are not taking a punt either way. We have been here too many times with Japan.

“I do not think fund managers know either. Those who are committed to being invested in Japan with their equity funds are always going to talk up the story and those that are not have probably just had their fingers burnt too often.”


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