All investors like to think of themselves as contrarians. Ever read an article by a fund manager explaining that his idea of stock picking is to simply follow, sheep like, other fund managers into buying the most popular stocks on the market? Of course not. Still, whatever managers are instructed to say by their marketing people mostly they aren’t remotely contrarian and mostly that’s a good thing: the way to make money is usually to be completely sheep like (buy things that are going up and sell things that are going down). Imagine if you’d decided to follow the classic contrarian strategy of buying the worst performing stocks in the FTSE two months ago? You’d now have a portfolio absolutely stuffed full of Northern Rock and Bradford & Bingley and a slightly embarrassed look on your face.
Sometimes however it is possible to spot an investment that is so overlooked, so hated and yet so intrinsically cheap that it really is impossible to ignore. This was the case with gold 5 years ago and I’m almost certain it is the case with Japan’s miserable market (down 5.5% so far this year) today. It’s hard to think of a single mainstream commentator with a good thing to say about Japan.
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Yet its economy is growing a reasonable rate; balance sheets are healthy; and importantly Japan is much less dependent on the US than the emerging Asian economies investors are so crazy about (Japanese exports to Asia are greater that its exports to the US and Europe combined). The market is also cheap. There are many ways to measure this kind of thing but Peter Tasker of Arcus Investments in Tokyo points to a long standing buy signal for the market – the relationship between the market’s average dividend yield and the 10 year bond yield.
That hasn ‘t quite happened yet but, says Tasker, if you add into the equation the effect of the share buybacks seen in Japan this year “total shareholder payout” now “comfortably exceeds benchmark bond yields.” In the last 14 years this has happened three times. On all three occasions the signal was followed by “substantial bull runs.”
First published in The Evening Standard