(March 22, 2012) — Japan could hold the key for equity investors seeking returns, market participants have said this week, as disappointing numbers from economic powerhouse China have made investors rethink their portfolio holdings.
News agency Reuters reported this morning that the HSBC flash purchasing managers index, the earliest indicator of China’s industrial activity, fell back to 48.1 from February’s four-month high of 49.6. New orders sank to a four-month low, an expected rebound in export orders failed to emerge and new hiring slumped to a two-year low.
As Asian markets failed to rally after the news, a note from analysts on Deutsche Bank’s ‘cash return on capital invested’ (CROCI) desk this morning warned investors to ‘ignore Japan at your peril’.
The note said: “We still find pockets of good value in Japanese equities, especially exporters. Japanese companies have dominated our value screens for some time. The collapse in the yen and the strong rally in Japanese equities are adding momentum. The market appears to have given up on Japan ever yielding cost of capital (COC) returns, but Japan has the highest operational leverage of EBIT to revenues growth in the developed world. Further Yen weakness would be the icing on the cake.”
The paper highlighted: “For investors interested in distressed value in Europe, Japan offers a better value proposition.”
Holders of Japanese equities have already been treated to a promising start to this year, according to figures from Thomson Reuters. In local currency terms and based on the MSCI country index series, Japanese equities have outperformed a basket of the largest developed economies in 2012 by some margin. Japanese equities have made a 20% return, compared to Germany which came in around 17.5%, Thomson Reuters said.
The MSCI China index only rose by around 11%, on a local currency and dollar basis, with Hong Kong only slightly higher, rising around 15% on both bases.
In dollar terms, Japan has not outperformed other nations, but Deutsche Bank’s analysts said a potentially weakening yen was a boon investors should seriously consider.
The note said: “There is still much scepticism surrounding Japanese equities. The general view is that Japan is a country with an ageing population, low GDP growth, high debt and badly managed companies. So why bother? Two reasons: first, the significant pockets of value present in the market and, second, currency.”
They said the current price-to-book of Japan is still around the lowest levels seen in the past 22 years and the proportion of Japanese companies trading on a low price-to-book is still close to being at an all-time high.