What is the attraction of current Japanese stock market?

Japanese stock market

Size and performance of Japanese stock

Japanese stock market falls to world’s fifth

According to statistics from Statista, in terms of the total market capitalization of listed companies, the global stock market rankings in 2023, the size of Japanese stocks will fall to fifth in the world, losing to New York Stock Exchange, Nasdaq Exchange, Shanghai Stock Exchange, Euronext; only a little bigger than the sixth largest Shenzhen Stock Exchange and the seventh largest Hong Kong Stock Exchange.

The decline of Japan

At the end of 1988, 32 of the top 50 companies in the world by market capitalization were Japanese companies, but after 2009 only Toyota Motor Corporation (ticker: TM) remained.

Japanese investors prefer US stocks

Japanese personal money is pouring into overseas stocks. In 2021, the amount of investment in overseas stocks via domestic investment trust funds will increase to 8.3 trillion yen. This is nearly 300 times the amount invested in Japanese stocks (28 billion yen). The reason is that investors prefer overseas companies with outstanding capital efficiency.

The direct reason for the flow of Japanese personal funds abroad should be the gap in corporate competitiveness. Return on equity (ROE) represents the efficiency of profit creation. According to estimates based on QUICK FactSet data, the average ROE of stocks in the TOPIX stock price index (TOPIX) in the past 20 years has been between 5% and 10%. The ROE of the US S&P 500 remains above 15%.

Retail investors are not willing to invest in Japanese

The results of the 2021 shareholder distribution survey published by the Tokyo Stock Exchange in 2022 show that in terms of value, the shareholding ratio of individuals is 16.6%, which is half that of 50 years ago. According to statistics from the United Nations, Japan’s current population is 125,373,174, but the number of individual accounts opened in the Japanese stock market in 2020 is only 59.81 million; only 47.73%; As I mentioned on page 46 of Sections 1-4 of my recently published book”The Rules of Super Growth Stocks Investing“, the same figure in Taiwan is 52.22%.

Rose to a 30-year high because of Buffett

The Nikkei 225 Index closed up 238.04 points or 0.81% to 29,626.34 points on May 15, 2023, the highest record since November 2021; the Topix stock index also rose sharply by 18.46 points or 0.88% , to close at 2,114.85 points, reach the highest level in the past 30 years.

Buffett’s endoresement

Five Japanese companies Buffett invested in

For the past six months, the S&P 500 Index has been fluctuating between 3,800 and 4,200 points. Dismantling the fuse of the U.S. federal debt default bomb, some U.S. stock investors who have not yet adopted the suggestion of “sell stocks and leave in May” may also have the idea of ​​leaving the market.

So where to turn? Buffett’s trip to Tokyo in April put Japan back on many people’s investment maps. Experts often advise investors to diversify, but many struggle to do so.

The financial website MarketWatch reported that Takeda Masakazu, portfolio manager of SPARX Asset Management, said Berkshire Chairman and CEO Warren Buffett’s aggressive investment in Japan has drawn attention to some investment opportunities in the Asian country that had otherwise been overlooked.

Why does Buffett like these five Japanese companies?

Berkshire initially invested in the five major trading companies (trading companies) in Japan in 2020, including Mitsubishi Corporation(ticker: MSBHF), Mitsui & Co., Ltd.(ticker: MITSY), Sumitomo Corporation(ticker: SSUMY), Itochu Corporation(ticker: ITOCY), and Marubeni(ticker: MARUY), and recently increased its purchases, increasing its shareholding in these five major trading companies to 7.4%. .

Takeda Masakazu said in a recent blog post: “These companies, collectively known as ‘general trading companies’, are a diversified conglomerate with businesses in food, consumer products, renewable energy, metals for electric vehicles and medical care. “

Buffett told CNBC during a visit to Japan in April that he was drawn to the five trading houses because of their similarities to Berkshire and the fact that their shares trade at “ridiculous” low prices.

Takeda Masakazu said: “Buffett selected stocks with low price-to-earnings ratio (P/E) and low price-to-book value ratio (P/B), which echoes the low valuations that can be seen everywhere in the Japanese stock market.” He also pointed out that the five major The return on equity (ROE) of the trading company is between 18% and 25%, which is much higher than the 8% of the Japanese stock market.

Moreover, since 2017, the combined earnings per share of the five major trading houses has been expanding at an annual growth rate of 20.1%, so they have generated “substantial excess cash flow.” In addition, these companies have grown their dividends by an average of 12.9% over the past five years and offer a stock yield of 3% to 5%, which is quite “attractive.”

Masakazu Takeda also mentioned that Japanese business executives have changed their past practices and in recent years have regularly increased dividends and expanded the purchase of their own stocks. For example, Mitsui and Mitsubishi are currently planning the largest share buyback program in history.

At current stock valuations, the allure is irresistible, even if global conglomerates are difficult to value. Based on this reason, their stock valuations are often discounted, and the discounts of the five major trading companies are particularly “substantial.”

However, one question that must be paid attention to now is: Is the Japanese market, which has generally performed relatively poorly in the past 30 years, now ready to go, and is it about to feel proud? Some seasoned investors may start to roll their eyes when they hear this old-fashioned question, but Masakazu Takeda made a few important points worth considering.

“3 strikes and 1 ball” of Japanese Stocks

Compared with U.S. stocks, Japanese stocks are very attractively valued at the moment. In terms of price-to-earnings ratio (stock price divided by earnings per share), the price-to-earnings ratio of the Topix Stock Index (TOPIX) is now 15.72 times, which is lower than the 18.56 times of the S&P 500 Index.

Topix’s stock price-to-net value ratio is 1.29 times cheaper than that of the S&P 500, but it offers a dividend yield of 2.4%, which is about 44% higher than that of U.S. stocks. The Topix index has risen more than 10% this year.

Takeda Masakazu pointed out that the amount of stock buybacks in the Japanese stock market this year is expected to reach 67.7 billion U.S. dollars, a record high.

But there’s one big downside: Overall, earnings-per-share growth in Japanese equities remains sluggish. Some companies have grown fast, like the Big Five favored by Buffett, while others have faltered.

Advantages of Japanese stocks

Much lower volatility

Japanese stocks are much less volatile than U.S. technology stocks.

Loose monetary policy

Borrowing costs for U.S. businesses have risen sharply as the Federal Reserve has aggressively raised interest rates. While the U.S. Federal Reserve (Fed) has been raising interest rates aggressively for more than a year, the Bank of Japan (the central bank) has kept its ultra-loose policy unchanged. The 10-year Japanese government bond yield is now back below 0.5%. This is partly the reason for the recent surge in Japanese stocks.

Dividend

It is because of the improvement of corporate governance standards in Japanese stocks, and the return of cash to shareholders by companies; the dividends distributed by Japanese companies have also increased significantly.

Repurchase

Share buybacks by Japanese companies hit a record $71.4 billion in the year to March.

High net cash

Nearly 50% of Japanese companies have net cash on their balance sheets, compared with just over 20% of U.S. companies. Moreover, about 54% of companies in the Topix index are trading below book value, compared with just 7% of companies in the S&P 500.

Price-to-book value ratio

The price-to-book ratio (P/B) of the Japanese stock market is only 1.3 times, while the price-to-book ratio of the European and American stock markets are 1.8 times and 4.0 times respectively. A firmer foundation and a higher ceiling were established.

U.S. debt ceiling concerns

Concerns that the U.S. budget is approaching the statutory debt ceiling in the near future will lead to a U.S. debt default and lead to a possible catastrophe in the capital market. This may also be the reason why some investors abandon U.S. stocks and switch to Japanese stocks to avoid risks.

Fund ownership ratio is low

Allocations to Japanese equities remain a net 11 percent underweight in a Bank of America survey of global fund managers in May. Although “reduction” itself is not enough to constitute a reason for investors to increase allocation, comprehensive consideration of factors such as performance improvement, valuation decline, and the low “stock price-to-cash flow ratio” of major Japanese stock index constituents is enough to attract fund traders to buy Into high-quality Japanese stocks.

Excellent performance this year

Many investors did not pay attention to the performance of the Japanese stock market, which suddenly rose to a new high in the past three decades. Japan’s Topix Index (TOPIX) closed up 0.3% to 2133.61 points on May 17, the highest closing point since August 3, 1990. The benchmark Nikkei 225 has risen more than 15 percent so far this year through May 17, outperforming the S&P 500’s gain of 8.3 percent.

The performance of the S&P 500 Index since 2023 has underperformed Japanese stocks, which is beyond the expectations of most investors! The Nasdaq 100 has risen more than 24% so far this year, and the largest ETF tracking Japanese stocks — iShares MSCI Japan (WJ) — was up 11.8% through Wednesday, compared with a gain of 11.8% for the S&P 500 The index’s SPDR S&P 500 Trust (SPY) gained 8.6%.

Buffett’s halo

Buffett’s Berkshire recently increased its investment in Japan’s five major trading companies, becoming Berkshire’s largest overseas stock investment market. Moreover, Buffett personally visited Japan to explore more investment opportunities. After being reported by the media, it is nothing less than a big publicity for Japanese stocks.

Japanese stock market
credit: harris-fraser.com

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