Japanese Stocks Catching Some U.S. Eyes Again
New highs for stocks have become almost routine in most markets worldwide in 1997. And then there is humbled Japan.
More than seven years after the Tokyo stock market’s Nikkei-225 index peaked at 39,000, Japanese stocks overall are still priced about half off: The Nikkei index closed at 19,853.89 on Tuesday.
Despite some strong rally attempts this year, the index is up just 2.5% since Jan. 1, one-tenth the 24% gain in the U.S. Standard & Poor’s 500 index.
Anyone with even a cursory knowledge of stock market and economic trends in the 1990s knows what has ailed Japan: a massive banking and real estate collapse; a surge in the yen’s value relative to the dollar, boosting prices of Japanese exports; and a culture more worried about saving face than dealing honestly with its root problems.
OK, OK. But most troubled economies don’t stay that way forever--as California is demonstrating with its burgeoning recovery. And in fact, the surprise this year has been the rather robust tone of the Japanese economy, clearly led by the export sector as the yen has finally weakened a bit.
Moreover, the latest Bank of Japan survey of domestic businesses, issued June 25, showed unexpected optimism about the future.
Could Japanese stocks at long last be on the verge of a significant rally--one that would revive the term “bull market” in Tokyo for the first time since the late 1980s?
*
Some U.S. money managers say they are paying more attention to Japanese stocks today than at any other time in the 1990s. One such manager is Jean-Marie Eveillard, the veteran global “value” stock picker who heads the SoGen International fund in New York. “We’re spending a lot of time researching Japanese securities now,” he says.
He also has been buying a few: Japanese stocks now make up about 8% of the SoGen fund, up from virtually nothing a few years ago, Eveillard says.
The appeal of the Japanese market is partly relative, Eveillard admits. He is growing uncomfortable with stock prices in Europe and in many emerging markets, given their spectacular gains this year. In addition, he wonders whether individual Japanese investors might soon become attracted to domestic stocks again, if they begin to believe that their economy’s recovery is real.
While the Japanese stock market is down 50% from its peak, the country’s mutual fund industry is just one-tenth the size it was in 1989, Eveillard says. Many Japanese, their portfolios decimated by the long bear market, obviously have given up on stocks completely--not unlike Californians who believed a couple of years ago that the state’s real estate market would never come back. (Surprise!)
Meantime, some analysts argue that the next step in Japan’s recovery may be a boom in mergers--a fast way for Japanese firms to rationalize excess capacity and shore up their financial positions, a la the U.S. restructuring wave of the last decade. “The restructuring of corporate Japan’s balance sheet is a necessary condition of a new and lasting bull market,” says Alexander Kinmont, Japan analyst for Morgan Stanley & Co.
But for now, the problem with Japanese stocks is that on face they simply don’t look cheap at all. The average Japanese blue-chip price-to-earnings ratio is still about 60, according to Morgan Stanley. That’s about three times the U.S. average P/E.
Allowing for accounting differences and the depressed state of Japanese corporate earnings, however, one can argue that the Japanese P/E is exaggerated. By other measures--price-to-cash-flow and price-to-book value, for example--the Japanese market looks evenly valued with other world markets, perhaps even undervalued.
Eveillard believes that two of his Japanese stocks, film maker Fuji and insurance giant Tokio Marine, are “both very reasonably priced” versus their fundamentals and other global blue chips.
Still, many U.S. fund managers won’t take the plunge in Japan. David Herro, manager of the Oakmark International fund in Chicago, argues that Japanese stocks overall remain overpriced. Worse, he warns that if Japan’s newly swelling trade surplus brings political pressure on the government to finally pry the economy open for truly free trade, the result will be devastation for many Japanese companies’ long-protected domestic profit margins.
“I don’t see any reason why these stocks should be selling for 20% to 30% premiums” over their foreign peers, Herro concludes. Nothing says that Japan’s bear market, old as it is, can’t get older, he notes.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Stuck in Neutral
Japanese stocks have rallied from their lows in mid-1995, but the market overall today is barely above its level of mid-1993--even as the economy continues to recover. Nikkei-225 stock index, midyear and end-of-year closes and latest:
Tuesday: 19,853.89
Source: Bloomberg News
