Why I favour Japan over the UK market
The FTSE 100 is cheap, says Tim Price. But it’s not where I would invest now. The best value is to be found in Japan. Here’s why.
Editor's note: this morning we have a guest post from Tim Price, acclaimed value fund manager and regular MoneyWeek contributor.
Earlier this year, the Financial Times led its weekend edition with a front page splash: Buffett backs Britain.
It sounded like a resounding endorsement of the UK market by the world's most famous investor, Warren Buffett.
If you dug a little deeper, the truth was somewhat more prosaic.
Japanese companies are waking up to reality
Despite his kind words, the world's most famous investor wasn't actually putting his money where his mouth was so much as lending moral support to a financial market that many claim is being "artificially" discounted by issues relating to Brexit.
With all due respect to Mr B, and noting that regardless of the article he has yet to commit any meaningful new capital to the UK, he is probably understating UK political risk.
We would suggest that the FTSE trades where it does, not so much because of overblown Brexit chatter, but rather because both domestic and global investors have no great enthusiasm for a possible future government led by two unashamed Marxists.
A couple of weeks before the Buffett splash, meanwhile, the FT carried an interview with George Roberts and Henry Kravis, the co-founders of private equity specialists KKR.
The pair view Japan as their "highest priority" outside the US, as big companies including Hitachi, Toshiba and Panasonic sell off non-core subsidiaries, and creating "potential gold mines for private equity".
According to the FT, Roberts believes that the improvements in Japanese transparency and corporate governance that were started by current prime minister Shinzo Abe and his administration, "now [have] the momentum to survive beyond his time as prime minister." As a result, Japan represents "the best value today," according to KKR co-founder Henry Kravis.
Is it really different this time for Japan?
False dawns in Japan have scarred plenty of investors. Could it really be different this time? Well, Japan represents our single largest country commitment, both in our fund and in our managed accounts. We clearly believe that it is.
Jan Pstrokonski is the manager of the Samarang Japan Value Fund, which invests in undervalued small- and mid-cap Japanese companies. Here is what he wrote in a recent commentary:
"I would like to emphasise the quality of the companies we are able to buy, thanks to the continued generosity of the short-term trading community involved in smaller Japanese companies...
"We have been buying more of some companies at ordinary valuations that would surely be very expensive in the West. We have been increasing our exposure in one sewage consulting company that is now developing drone systems which it can provide to utilities for a recurring fee.
"We are adding to another company that is rapidly growing cashflow from monthly broadband contracts, then using that cashflow to invest in IoT services such as security cameras.
"We have been adding to one small company that is the largest intermediary of accommodation for salarymen on business trips. Our largest logistics investment has a lock on all the major industrial chemical tanker storage sites in Japan, and is now investing into a new and parallel business with significant tailwinds.
"Our largest chemical industry investee has a dominant position in raw materials for UV-protective cosmetics, which have high barriers to entry and are growing quickly in Asia. None of these businesses has valuations indicating any kind of future potential.
"While picking out which quarter will be weaker or stronger is a difficult game, it is much easier to predict that undervalued and practically unknown companies that are doing their homework will be worth more in the future."
Warren Buffett within Berkshire Hathaway is sitting on over $100bn of cash. As he has himself frequently conceded, the scale of his business undoubtedly inhibits future returns.
But while Buffett may be constrained by the size of his asset base and may even be considering investing in the UK those of us with more modest levels of investment capital to deploy can invest on a geographically unconstrained basis where we can fish in a far broader investment pool, and take advantage of a much more populous, not to say compelling, investment universe.
Tim Price is co-manager of the VT Price Value Portfolio and author of Investing through the Looking Glass: a rational guide to irrational financial markets.