About the author: Patrick L. Springer is an institutional-equities business developer and Japan and Asia market specialist. He worked at Morgan Stanley in management roles for more than 20 years.
Japan just concluded a 34-year trek in the wilderness of deflation and ended its nearly 20-year negative interest-rate policy. The stock market has responded by achieving new all-time highs, last seen in 1989, rising 35% in the past year.
This might look like the top, but a closer look at Japan’s market suggests that the end is just the beginning for the world’s third-largest market. This year likely marks the beginning of a multiyear Japan market revival that will start a major new capital markets cycle. Japan’s companies are just beginning to celebrate a long-awaited return of pricing power supported by an enamoured global investor base looking for international ideas in a friendly market.
Investors should focus on two trends. First, new micro and macro forces are at work to make Japan a preferred non-U.S. destination for several years. With the U.S. dollar at 20-year highs, portfolio managers know that it is typically time to diversify and buy cheaper overseas markets, but where to go? Europe is cheap but challenging, and the I of India is what currently remains best of the emerging markets BRICS grouping. Exposure to Asia is important for global portfolios given it is 45% of global gross domestic product. Yet strategists say that we now live in a “multipolar world,” a euphemism for the highest level of geopolitical risks in the world in decades. This limits China investment allocations for now.
But Japan is a pre-eminent security partner for the U.S. Japan also is quickly becoming a key partner in U.S. re-shoring strategies, especially as an alternative supplier of semiconductors and technology components. The re-shoring trend is compounded by the yen’s weakness. At nearly 152 yen to the dollar, Japan’s currency is trading at the lowest ratio since 1990. That means Japan is also likely to regain market share that it lost over the past 20 years to China in automobile components, industrial products, and machinery. Status as a security partner matters to investors now, which will keep allocations to Japan higher for longer.
Second, Japan’s differentiated market structure may provide more alpha-idea opportunities than investors might expect from an older, developed economy. In the U.S., megacaps and the Magnificent Seven rule the world for investors—and for good reason, given their recent outperformance. The high level of exchange-traded fund penetration in the U.S. also favours large-caps over small- and medium-capitalisation stocks. But in Japan, the list of Japan’s largest companies remains unchanged: Excluding SoftBank, all were established pre-1960.
According to Abrdn Investments, 45% of Japan’s benchmark Topix Index of 2000 constituents have no analyst research coverage, compared with just 3% of the Russell 3000 universe for the U.S. As inflation sparks growth, earnings surprises and inflections of Japan’s under researched companies will lead to significantly higher alpha capture opportunities.
Additionally, the Japanese government and the Tokyo Stock Exchange have initiated important corporate-governance reforms, and 26% of all listed companies have submitted specific plans to improve their stock valuation. But many more companies have yet to respond, providing more opportunities for investors.
Sorting Japan’s nearly 3,900 stocks into market segments is revealing. Japanese mid-cap and small-cap stocks have lagged behind large-cap stocks by 40% and 60% year to date, respectively, and have lagged by 25% and 46% on a one-year basis.
Such underperformance by itself is one thing, but for the many investors who have never seen inflation, wage growth, and domestic sales gains in Japan, they may find a discovery universe of new stocks with interesting characteristics such as these:
Organo , a $2 billion market-cap water treatment company that has traded over $60 million a day on some days and counts Taiwan Semiconductor Manufacturing as one of its key growth customers.
Nakanishi , a $1.5 billion dental-equipment and precision-tools maker that grew sales 23% last year, sports a 2.5% yield and a 24% return on equity, and has 12% of its stock price in net cash.
Chugoku Marine Paints , a global top-three maker of marine paints that has a 20% global share and a 15% return on investment capital, sells at nearly 11 times earnings, and has a 2.6% dividend yield.
Overall, this analysis finds nearly 100 companies with a market cap above $1 billion with net cash equal to 20% or more of their stock price.
The bottom line is that Japan’s culture of innovation, combined with an end to deflation, is likely to produce a new wave of capitalisations. During the decades of deflation, corporates and consumers alike were incentivised to save more, spend less, and underinvest. But with nominal GDP growth now running at a whopping 5% and record wage growth, inflation incentivises new capital investment, stimulating a new investment-banking cycle of financing.
There are risks to this outlook. Double-digit market rallies can lead to pullbacks, and investors need to watch for threats to Japan’s inflation and currency levels and to its appetite for reform. But what’s most important for investors to realise about Japan is how much has changed there, amid a changing world.
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U.K.-listed mining giant’s chairman says the proposal undervalues the company
LONDON— Anglo American on Friday rejected a $39 billion takeover proposal from rival BHP, saying the bid “significantly undervalues” the company and setting the stage for a potential bidding war.
London-listed Anglo American said the unsolicited proposal, which was made earlier this month and which became public this week, features an unattractive structure that is too uncertain and complex .
Anglo American Chairman Stuart Chambers said the company stands to benefit from its portfolio of assets, including copper, that are likely to experience growth from trends around the energy transition. BHP’s bid, Chambers said, is opportunistic and dilutive for shareholders.
BHP’s all-share offer valued Anglo American at about $38.8 billion, and would have been contingent upon Anglo American spinning off shareholdings in two South African-listed units. The proposal represented a premium of about 31%, not including the South African-listed units, based on Tuesday’s closing prices.
Some analysts had predicted Anglo would find the bid too low and are expecting BHP to return with another. BHP has until May 22 to make a firm offer, though the deadline can be extended. Industry participants expect other large miners to also take a run at Anglo, whose share price has dropped since 2022 as lower commodity prices have ripped through the industry.
A tie-up between BHP and Anglo American, which would be the largest mining deal on record, would illustrate the growing importance of copper, a metal essential to clean-energy products , to a sector that has long relied on Chinese industrialisation to boost profits.
Copper represents some 30% of Anglo American’s output, while BHP counts a majority stake in Chile’s Escondida, the world’s biggest copper mine, among its assets. BHP bought Australian copper-and-gold miner Oz Minerals for $6.34 billion in May last year, representing its biggest acquisition since 2011.
Copper prices are up some 15% so far this year, reflecting expectations that demand for the metal will rise as the world decarbonises and supply will be constrained. Electric vehicles and wind farms use copper in much greater quantities than gasoline-powered cars and coal-fired power stations.
Anglo American has been reviewing its assets in recent months, and has held early conversations with potential buyers for its storied De Beers diamond unit, which it values at more than $7 billion, The Wall Street Journal reported Thursday.
Activist firm Elliott Investment Management holds a stake in Anglo American worth roughly $1 billion, accumulated over several months and before BHP’s move on the miner, according to a person familiar with the matter. The firm is widely known for its campaigns to push companies for change to boost their stock prices. Its view of the Anglo American holding couldn’t be learned.
That said, a jump in Anglo American’s share price following BHP’s takeover offer indicates Elliott has already profited from its holding, potentially reducing any incentive for it to take any action until the outcome of BHP’s bid becomes clearer.
Anglo’s stock on Friday traded above the implied value of BHP’s offer, indicating the market expects a higher bid to emerge.
Consumers are going to gravitate toward applications powered by the buzzy new technology, analyst Michael Wolf predicts
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