Amid rising concerns over global economic growth and trade tensions, central banks across the globe are once again turning to interest rate reductions to help bolster growth. As a result of this unprecedented monetary easing, the spread between the performance of Japanese growth and value stocks has widened to levels not seen in recent years.
Against this backdrop, value investors—who are seeking to generate excess returns through fundamental research that identifies companies with poor stock performance due to temporary structural issues—have been met with both new challenges and opportunities.
On one hand, a market driven by macro forces and easy access to low-cost capital has not rewarded value investors so far in 2019. On the other, we believe the current P/E level for Japanese equities and continued structural changes in Japan are combining to create compelling investment opportunities for those who have not yet seen a full manifestation of the value effect or of recent corporate governance reforms.
Japan Equity Valuations at Historic Lows
The current P/E level for the Tokyo Price Index (TOPIX) is 13.0x. This is not only significantly lower than the index’s average of 15.6x over the past ten years, but also than the level of most other major market indices. For example, the S&P 500 (US), CAC40 (France), DAX (Germany) and SENSEX (India) are all trading at higher multiples than the TOPIX.
Source: Bloomberg as at 13 September 2019