Value investing in Japan will have its day in the sun again
A Nomura report claimed a couple of years ago that ‘Japanese value investors are extinct.’ That is not quite true but, since the Global Financial Crisis, only the most determined investors have kept going. Relative returns from value stocks actually bottomed out in 2016 but there is little sign of any escape from the value trap which scornful commentators like to refer to.
The cause is not hard to seek: Japan has endured ultra-low interest rates for nearly 30 years and negative nominal economic growth for the first 20 of them. Investors have responded by putting a huge premium on those stocks who have been able to demonstrate growth and/or a sustainable yield. The dispersion between growth and value has therefore risen to extreme levels.
And yet, and yet… since 2001 Japan Inc. in aggregate has consistently generated positive free cash flow, the economy has generated positive real growth over the past three years and where else in the world can you find thousands of companies on a Price to Book of less than 1.0?
One clear message from history is that when relative valuation measures become stretched (for example 2001 and 2008) there are excellent returns for value investors who are prepared to stick to their last. We believe that will happen again but, as ever, patience will be required to benefit.
Our friends at Arcus Invest, one of the Japanese value survivors, have written a further instalment of their regular white papers - Fortune Rota Volvitur (loosely translated as ‘value investing will have its day in the sun again’) - on this subject with much more detail. Please let us know if you would like to see a copy.