Business | Opinion
Spying an investment opportunity
Japanese equities could be the next big story...or the next biggest disappointment
- By Matthew Vincent, Financial Times
- Published: 00:00 March 13, 2010
Would you like me to write about the next big investment opportunity? Or attempt a lightweight historical analysis of recent shifts in global economic power? Okay, then. If that's what you'd prefer...
I reckon one of the best ways to gauge the rise and fall of dominant world economies is to watch old spy movies. Early Bond films portrayed a very 1950s British agent in almost comic denial of postwar austerity and US economic supremacy. By You Only Live Twice, both the UK and US were in fear of Japan's corporations and innovations. In the 1990s, the double dealings were with emerging eastern Europe and Asia. And I wouldn't mind betting that Daniel Craig's next outing brings him up against the global force of China.
All right, enough of this. You really want to know about that investment opportunity, don't you? Well, even here, a knowledge of the Broccoli dynasty's productions can be instructive.
In the past 50 years, there has been a strong tendency to pursue the next big thing wherever Mr Bond was last seen pursuing Mr Big. Over recent decades, investors have been advised to buy into the US, Japan, Asia, eastern Europe and China in roughly that order — but, like most megalomaniac villains, they failed to profit from world domination.
In fact, the only time analysts ever revisit old locations, it's as a backdrop to the current picture. Last week, for example, F&C's strategist Ted Scott only looked back to 1980s Japan to inform his view of China today. But I would challenge this retro view of Japan, and the US.
While the latest incarnation of Bond's US sidekick, Felix Leiter, may be struggling come to terms with US budget cuts, his fund manager namesake isn't. Felix Wintle, manager of the Neptune US Opportunities Fund, praised the frugality of American businesses in a bullish outlook statement a week ago. "Corporate profits should continue to rebound as companies — driven by the recovery in sales growth leverage off the cost-base efficiencies delivered during 2009," he said.
Numbers game
Threadneedle's Sarah Arkle while an altogether less "evil queen of numbers" than Judi Dench's M has done the maths on US equity valuations. She points to forecasts for 30 per cent earnings growth from large caps that recently traded on a price/earnings (p/e) ratio of 13 times. Historically, the mean p/e of the S&P 500 is 16.35, suggesting potential for a 50 per cent uplift in some US share prices, if they are re-rated.
Nick Skiming of Ashburton's American Equities team argues that, even if earnings for US companies meet more conservative expectations of 25 per cent growth in 2010, the S&P 500 could still end up trading on a forward multiple of around 15.5 times, which is "not inordinately expensive".
However, others believe investors will find more to investigate in Japan. Stephen Harker, manager of the £850 million (Dh4.69 billion) GLG Japan CoreAlpha Fund, believes that value in Japan — rather like the volcano recced by Sean Connery in his gyrocopter — has been overlooked for too long.
"There is a view that Japan underperforms other markets but that view is out of date," he told me last week. "If investors had adopted a buy and hold strategy in Japan from 1999 they would have done as well as they would have from the FTSE All-Share. There is a pathological hatred of Japan on the part of European investors who think they lost more money than they have."
On valuation grounds, though, he now sees opportunity to make money. He notes that Japan's corporate restructuring triggered by the "lost decade" in the 1990s — has delivered cost cuts and 13 consecutive years of high free cash flow at Japan's leading companies.
Chris Taylor, manager of Neptune's Japan Opportunities fund, agrees: "The Japanese know how to manage companies and have cut costs or restructured companies way ahead of their foreign competitors." Ian Burden at Threadneedle, believes this will deliver "a strong earnings recovery, starting March 2010 and continuing to March 2012".
But while Neptune, Threadneedle and Barclays Wealth all believe the big picture is about Japanese exporters and depreciation of the yen, Harker says exports are "only part of the story". Reminding investors that Japan's export ratio is not much higher than that of the US, at around 13 per cent of gross domestic product, he sees better value in domestic defensive stocks: big financials, pharmaceuticals, railways and retailers.
On his preferred metric of price-to-book value, Japanese equities remain extremely cheap, trading on 1.1 times assets — a ratio only just above the 40-year low reached in 2009. Retail giant Seven&I, for example, currently trades on only 1 times book value. "We find it hard to see why Japan should underperform the US," says Harker.
Sometimes the next big thing can be the last big disappointment...if you only invest twice.
More from Business Opinion
More from Business
Business Editor's choice
-
China breaks West's solar monopoly
Some countries in the world, especially Germany and the United States, have made considerable efforts to invest in developing solar energy cells
-
Burberry store spree will cut profit
Trenchcoat maker forges ahead with investment strategy targeting emerging markets
-
Laws needed to spur region bond markets
UAE Central Bank calls for creation of a centralised Sharia board to facilitate the sale of sukuk
