Most share markets look pretty expensive, reckons strategist Andrew Smithers. Over the next ten years, US stocks are likely to give a real (after-inflation) return that barely beats cash. Considering the risk you take on when you buy stocks, you’re probably better off putting your money in the bank. But one market stands out as offering relatively good value: Japan.
Japanese shares remain in the doldrums after a 20-year bear market. The Nikkei 225 index is still more than 70% below its 1989 peak. Japanese equities don’t look especially cheap on a price/earnings (p/e) ratio basis – the MSCI Japan index has a p/e of around 30.
But this doesn’t tell the whole story. While earnings “management” is the staple of a US executive, Ja-pan’s firms have often sat on cash or underperforming assets and focused more on sales volumes than profitability. Japan’s price deflation of the last 20 years has also encouraged a mentality of hoarding, rather than offering sweeteners to shareholders. But if you use price/book or price/sales ratios as your valuation measure, Japanese shares look cheap. And its export sector has continued to do well, even in the face of a strong yen, with many firms still world-beaters in their fields.
MSCI’s Japan index, the most widely used benchmark for European exchange-traded funds (ETFs), in-cludes a healthy selection of global brands – Toyota, Honda, Canon, Sony, Nintendo and Mitsubishi all form part of its top ten. The broader-based Topix index, which Lyxor uses for its Japan tracker, gives exposure to the same names, although the Topix has a longer ‘tail’ of small companies.
If you want to invest in Japanese large caps via an ETF, it’s hard to look beyond the iShares MSCI Japan fund (LSE: IJPN). At over £1.4bn in assets, it’s the largest ETF in the sector and so can be expected to offer the tightest secondary market dealing spreads, although you’ll pay a bit more in annual fees (0.59%) than on ETFs from db x-trackers (also based on the MSCI Japan index) and Lyxor (based on the Topix), both of which charge 0.5%.
But don’t overlook Japanese small-caps. These are cheaper than large caps and arguably have greater potential. The iShares MSCI Japan Small Cap (LSE: ISJP) also charges 0.59% and gives exposure to the 500 stocks just outside the main MSCI index by company size.
• Paul Amery edits
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