A significant opportunity
The numbers highlight the size of the opportunity. The companies in the TSE’s crosshairs – those trading at a P/B of below 1.0 times – account for 50 per cent of the TSE Prime Index (and 65 per cent of the Russell Nomura Total Value Index). Compare this to the S&P 500, where just 3 per cent of names trade at such low valuations.
Clearly, Japan has been a market in which companies have not sought to maximise shareholder value.
Today, however, there is nowhere else in the world where investors will find such a ‘self-help’ approach to improving returns.
As well as longer-term efforts to improve profitability, investors can now expect to see companies reducing cash and increasing share buybacks, as well as other improvements to capital policy, as these represent low-hanging fruit for companies that have historically shunned such practices.
So where do the biggest opportunities lie?
Companies trading on lower valuations tend to be old economy assets and as value investors we currently favour unloved domestic-facing stocks.
Retail, chemicals, transport and logistics, construction and real estate companies fall into this category, while energy stocks also present an opportunity.
Select technology companies – those lacking the high valuations of their global and US peers – are also attractive.
More broadly, with policy normalisation on the horizon, life insurers look well placed to flourish. Given the recent fallout from the collapse of SVB the upside for banks looks somewhat capped.
Life insurers, in contrast, offer no risk of deposit flight (customers cannot ask for their premiums back) and represent an attractive way to benefit from potentially rising rates without the danger of a liquidity event.
We will know more about the BoJ’s direction of travel in the coming weeks and months.
But the corporate governance movement is already here and picking up steam.
As Warren Buffet’s recent decision to increase his weighting in Japanese equities shows, it is rapidly becoming an exciting time to be a value investor in Japan.
Jeff Atherton is lead manager of the Man GLG Japan CoreAlpha Fund
