Haymaker Friday Edition
Haymaker Friday Edition
A Note From the Down Under Daily
Hello, Readers and Subscribers:
Way back in the mid-1980s when Ronald Reagan was in the Oval Office, the elder Haymaker, who began his career in finance in 1979, expressed one of his first reckless opinions: Japanese stocks were way too expensive. From that point, they proceeded to double. That would become a familiar outcome whenever he began to warn about overvaluation. Starting in early 1990, however, Japan’s indexes began one of the longest and deepest bear markets a developed-country stock market has ever endured.
Surprisingly, though, despite many years of poor, even pathetic, price performance, overall P/E ratios on Japan’s stock market remained far above most rich-country indexes, including the U.S. This was likely a function of the TOPIX and Nikkei, its two main indexes, hitting a P/E in the vicinity of 60 in the late ‘80s. It took a long time for valuations to normalize but in the aftermath of the Global Financial Crisis (GFC) P/Es fell to the mid-teens. By the end of the last decade, the TOPIX, or Tokyo Stock Price Index, currently comprised of 1,716 companies, had gone nowhere since the start of the 21st Century. In fact, even as late as last year, it was below where it traded in 1989!
Per this week’s Guest Haymaker, authored by my Aussie mate, Gerard Minack, a name very familiar to our regular readers, at its zenith in the late 1980s the CAPE (Cyclically Adjusted P/E; also known as the Shiller P/E) was almost four times its developed world peers. Now, however, with the S&P trading north of 20 times next year’s likely overly optimistic earnings estimate, the TOPIX is around 13 times profits projections. It currently trades at a 15% discount to its peer countries and just 60% of book value (price-to-book, or P/B, in his note).
Additionally, its home currency, the yen, is also markedly undervalued. Most pundits believe, and we agree, that the yen is the cheapest rich-world currency. Ergo, it’s an unusual combination of an underpriced market andcurrency. Illustrating this, as recently as June, the TOPIX hit an all-time low in yen terms vs the dollar.
Again, in yen, not dollars, the TOPIX had a massive breakout in early 2021. That was when it burst above its pre-Great Recession/GFC peak. As so often happens, after that upside “range expansion” it scooted over 40%, once more in yen terms. Its collapse versus the dollar wiped out almost all of that appreciation for U.S. investors.
As you will read, Japanese corporate profits have been strong. Its earnings per share have outperformed most of its peer countries. This reflects Japan’s herculean effort to returns on equity (ROE). Unquestionably, this has been working.
There are a couple of significant caveats, however. One, as Gerard notes, is that Japan’s sizable export sector is vulnerable to a global recession. In Team Haymaker’s view, that’s a serious risk. Also, which he doesn’t point out, but other experts have, is that should the yen keep appreciating, it will likely squeeze export-oriented companies profits. Those are already feeling pressure from, for it, hefty wage increases to Japanese workers. However, there is a positive offset to that in terms of increased domestic consumption, as Gerard also notes.
Net, net: the Japanese market remains an attractive destination for U.S. investor capital. As usual, dollar-cost-averaging is advisable, particularly when taking into account the Three Rs: Rising Recession Risks. Based on yet another punk jobs report this morning, that’s a threat to which Wall Street is belatedly smelling the coffee.
“According to the most recent data, approximately 40% of Japanese corporate earnings are generated in foreign currency. This significant proportion underscores the global integration of Japanese companies, many of which have extensive operations abroad, particularly in sectors such as manufacturing, technology, and automotive industries. The strong reliance on foreign markets naturally makes these companies sensitive to fluctuations in the yen’s value against other major currencies—particularly the US dollar and the euro.” -Grant Williams
Evergreen Compatibility Survey
The medium-term bull case for Japan remains intact
Gerard Minack, Down Under Daily
Originally published on September 2nd, 2024
Japanese equity returns have largely been driven by yen weakness through the past decade. In dollar terms Japan’s relative performance hit a new all-time low in June. However, the medium-term bull case for Japan remains intact: the market is cheap; return on assets and margins have risen; US$ EPS growth has been solid; emerging domestic inflation pressures point to rates normalising; and if the next global cycle is capex-led, as I expect, it will play to corporate Japan’s strengths…
Subscribe to Haymaker to read the rest.
Become a paying subscriber of Haymaker to get access to this post and other subscriber-only content.
A subscription gets you:
 | Subscriber-only posts and full archive |
| Post comments and join the community |
IMPORTANT DISCLOSURES
This material has been distributed solely for informational and educational purposes only and is not a solicitation or an offer to buy any security or to participate in any trading strategy. All material presented is compiled from sources believed to be reliable, but accuracy, adequacy, or completeness cannot be guaranteed, and David Hay makes no representation as to its accuracy, adequacy, or completeness.
The information herein is based on David Hay’s beliefs, as well as certain assumptions regarding future events based on information available to David Hay on a formal and informal basis as of the date of this publication. The material may include projections or other forward-looking statements regarding future events, targets or expectations. Past performance is no guarantee of future results. There is no guarantee that any opinions, forecasts, projections, risk assumptions, or commentary discussed herein will be realized or that an investment strategy will be successful. Actual experience may not reflect all of these opinions, forecasts, projections, risk assumptions, or commentary.
David Hay shall have no responsibility for: (i) determining that any opinion, forecast, projection, risk assumption, or commentary discussed herein is suitable for any particular reader; (ii) monitoring whether any opinion, forecast, projection, risk assumption, or commentary discussed herein continues to be suitable for any reader; or (iii) tailoring any opinion, forecast, projection, risk assumption, or commentary discussed herein to any particular reader’s investment objectives, guidelines, or restrictions. Receipt of this material does not, by itself, imply that David Hay has an advisory agreement, oral or otherwise, with any reader.
David Hay serves on the Investment Committee in his capacity as Co-Chief Investment Officer of Evergreen Gavekal (“Evergreen”), registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940. The registration of Evergreen in no way implies a certain level of skill or expertise or that the SEC has endorsed the firm or David Hay. Investment decisions for Evergreen clients are made by the Evergreen Investment Committee. Please note that while David Hay co-manages the investment program on behalf of Evergreen clients, this publication is not affiliated with Evergreen and do not necessarily reflect the views of the Investment Committee. The information herein reflects the personal views of David Hay as a seasoned investor in the financial markets and any recommendations noted may be materially different than the investment strategies that Evergreen manages on behalf of, or recommends to, its clients.
Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this material, will be profitable, equal any corresponding indicated performance level(s), or be suitable for your portfolio. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.
20240907
