Why Japan is now even better value

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Japan: a market to get excited about

Many equity markets suffered their worst October since the financial crisis a decade ago. But in the past few days they have found their feet again. Investors appear to have decided that all their concerns are “not yet enough to end the current cycle”, as George Lagarias of accountancy firm Mazars told the Financial Times. The main worry was the receding tide of central-bank liquidity, while expectations for US earnings have been reined in; more political turmoil in the eurozone and trade disputes have also unnerved investors.

Still, as long as “central-bank hawkishness doesn’t manifestly slow the global economy”, says Lagarias, “it’s probably premature to feel afraid”. Global growth may have eased, but it has hardly been snuffed out, while the US still looks healthy. US stocks also like divided government, adds Hamish McRae in the Evening Standard. There’s life in the bull market yet.

Lagging the world

What’s more, now that markets seem to have calmed down, promising markets will be cheaper. Enter Japan, which we have considered a bargain for some time. Having suffered some of the steepest declines of all major equity markets in the past few weeks, it is now even more appealing.

Since the beginning of October the Nikkei 225 and the broader Topix indices have slipped by 8% and 9% respectively. Only Korea has done worse this quarter. Japan is considered one of the  world’s most cyclical markets, so jitters over the global outlook always tend to hit it hard. But now the stocks look “extremely cheap” compared with other markets, as Pictet Asset management’s Hiroshi Matsumoto points out on Bloomberg.

The days of Japan trading at a premium to global markets, a legacy of the 1980s bubble era, are long gone. The Topix is on a price-earnings ratio of just 13, while its price-to-book ratio is just 1.3. What’s more, the dividend yield is 2.2%, eclipsing the 1.9% available on America’s S&P 500 index.

This is partly due to improved corporate governance, with shareholders no longer considered an afterthought. Japan Inc. has also concentrated on becoming leaner and meaner during the long years of stagnation, and profitability has improved. Ernst Glanzmann of GAM Investments notes that companies are increasingly focused on return on equity, which surpassed 10% for the first time in 2017.

Our favourite trusts

The macroeconomic outlook is improving, thanks partly to the tightest job market in decades. Female participation in the workforce has risen by 1% a year, says Bailey McCann in The Wall Street Journal, while a more relaxed approach to immigration should also help address the problem of an ageing workforce. Cheap stocks and an increasingly solid economy add up to a compelling long-term investment story. Our favourite Japan investment trusts include Baillie Gifford Japan (LSE: BGFD) and Fidelity Japanese Values (LSE: FJV).