"There are plenty of thankless jobs in banking these days," writes the FT. "Marketing Japanese equities is one of them." The Nikkei 225 fell by more than 11% in 2007, while the broader Topix fared even worse, dropping 12.2%. When investors spot double-digit gains in the country's next-door neighbours, it's hard to get excited by Japan.
And so far, 2008 hasn't bucked the trend in fact, Japan is now officially in a bear market, with the Topix having fallen by more than 30% since its 12-month peak in February last year.
"But then buying is always best when it seems most eccentric", as Tom Stevenson puts it in The Daily Telegraph. On a 2008 p/e ratio of 15 times, Japanese equities are at their cheapest level in over 33 years, while dividend yields are now above those offered by long-term Japanese government bonds. On top of this, "in terms of price-book value, shares are cheap", adds Masaru Hamasaki, a senior strategist at Toyota Asset Management Co. in Tokyo on Bloomberg.
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The price-to-book-value ratio compares the value of a company with the value of its assets. By some estimates, more than half of Japanese firms are now valued at a lower price than they would fetch if they were shut down and all their assets sold off. "On average, Japanese stocks trade at a price-to-book-value ratio of a little over 1.5 times, compared with a global average of about 2.4 times," says Andrew Morse in The Wall Street Journal.
In fact, according to Leo Lewis in The Times, one in 20 Japanese stocks is valued at less than the cash on their books so effectively the company is "free' to any would-be buyer". So "Japanese stocks have clearly entered oversold territory vis--vis historical valuations, and vis--vis its global peers", says Darren Whitton on Yeald.com. The biggest price-to-book discounts can now be found in banks, building and metal producers, he says. Shoji Hirakawa, a strategist at the Tokyo office of UBS, tells The Wall Street Journal that he believes the Topix will hit 1,900 by the middle of 2008, which would be a 50% jump. Bargain-hunting investors are already on the prowl, with Chinese and Qatari sovereign wealth funds already snapping up stocks.
This should be some much-needed good news for Japan-focused investment trusts, especially those which invest in stocks that are not exposed to waning export demand from a weaker US economy. The Perpetual Japanese Investment Trust (PJI) trades at a 12.6% discount, with major exposure to utilities, pharma, retail and real estate. Meanwhile, the Baillie Gifford Shin Nippon (BGS) trust has a large weighting towards services and machinery, and trades on an equally attractive discount of 13.5%.
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