While most developed markets are richly priced, there’s one country that has caught our attention. Heidi Richardson, head of iThinking investment strategy, reveals where to find value.
Back in the ‘90s, visitors to Japan would return bearing tales of $200 melons and $5,000 cognac. Now, with that country’s bubble era long past, consumer prices are generally on par with other major global countries. One thing decidedly not on par: Japanese stock valuations. Most developed markets range from fully valued to expensive, even after the rough patch in September. While the Japanese market has recently seen a boost, stocks are still attractively priced, with a price-to-book ratio less than half that of the US. We think that’s too sharp a discount to pass up.
Market Realist – Since the US financial crisis (XLF), we’ve seen asset classes become more richly valued and, in some cases, downright expensive. Global equities (QWLD) have rallied across the spectrum. Bonds have followed suit, with central bank purchases as the impetus. The US has only recently concluded its quantitative easing program involving the purchase of ten-year Treasuries (TLT) and mortgage-backed securities (VNQ)(IYR). Global bond yields have been low, while equities are richly valued.
Market Realist – Scoring a bargain in this kind of scenario looks difficult. However, Japan (EWJ) looks like a good investment opportunity. Japan looks attractive due both to its valuation relative to other developed countries (EFA) and to its own history. The graph above shows the price-to-book ratios of Japan versus the US. The metric stands at 1.3x—much lower than the long-term average. The price-to-earnings ratio, on the other hand, has been hovering around 16x this year. The metric is not only at a discount to both the S&P 500 (SPY) and the European markets (EZU), but also a 37% discount to its ten-year average.
We’ll discuss how a number of catalysts are spurring Japanese equities in the next parts of this series.