Regular readers will know that I have long been a fan of the Japanese stock market – for the simple reason that unlike every other market in the world, it has been cheap. I’m not changing my mind now.
The scale of the humanitarian crisis in Japan is impossible to quantify. That’s not true of the scale of the physical damage. A vast amount of wealth has been destroyed but nonetheless, as CLSA’s Christopher Wood says, it is astonishing “how little damage has been sustained”, given the scale of the horrible disasters. Overall, even the most pessimistic of estimates are suggesting that the total cost will be in the region of 5% of Japan’s GDP.
That adds up to a serious hit but, for a rich economy such as Japan’s, it isn’t crippling – particularly given that the economy wasn’t operating at full-pelt pre-crisis anyway. What’s more, while disaster and recovery don’t do much for human happiness, the reconstruction effort will at least mean ongoing economic activity, spending and profits.
I’m not going to write much about the general situation in Japan here. Instead, I’m going to stick with the key point about valuations – and the reason I’m not changing my mind on Japanese equities. In the words of the investment strategy team at Lombard Odier, it is this: “The market is fundamentally cheap in a way that hasn’t been the case since 1989.”
The price to ten-year reported price/earnings ratio (just a longer term version of the p/e ratio) is at “levels unseen since the early 1970s”.
At the same time, Wood points to the fact that the price-to-book ratio on Tokyo’s Topix index is now just below one – you could buy the lot for less than you’d get flogging their assets in a fire sale.
A price-to-book ratio at this level is 40% below the global average. Are Japanese companies really worth that much less than everyone else’s companies? I can’t think that they are.
Nor can Mizuho Bank’s Tomochika Kitaoka. This would only be a correct level, he says, if “the very existence of Japan was at risk”. It is not.
Kitaoka also points to one other factor to suggest that the falls of this week represent a “fire-sale” style over reaction: the share prices of companies with no exposure to earthquake damage have fallen even more than those with obvious exposure. That tells us “stock price formation has deviated from fundamentals”.
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The one obvious worry for Japanese companies is the strengthening yen. But I don’t see this as a reason to keep out.
First, because this is hardly a new problem and Japan’s big exporters have shown that they can cope (they have huge production bases offshore, for starters).
And second, because the Bank of Japan appears, as one source told the press this week, ready to “do battle” for the yen. The BoJ is as capable of printing vast sums of money at will as the Fed, and this is just the kind of time when they might feel they should do so.
Either way, there is no getting away from the fact that Japan looks like a bargain buy. The experts are telling us that it isn’t possible for Fukushima to be another Chernobyl. If they are wrong, this won’t, in retrospect, look like it was the best time to take advantage of fire sale prices. If there isn’t another Chernobyl, it probably will.
The other question that the nightmare in Japan brings to the forefront is that of the future of nuclear energy. It is preposterous to think that this disaster will mean that the sector’s new life as a recognised source of greenish energy will come to an end. China may have temporarily suspended approvals for new plants but it has made it pretty clear that it isn’t actually changing its nuclear plan, just running an extra level of safety checks to make sure the lessons learnt in Japan don’t go to waste.
And as for the rest of us, while our governments might delay nuclear decisions, they won’t have much choice but to go with it in the end. Why? No choice. Global oil reserves won’t last forever. And most forms of alternative energy (solar, wind, wave) are still expensive and unreliable.
So if we all want our houses well-lit; our televisions and computers on standby all the time; heating when it is cold; air-conditioning when it is hot; and to constantly be in places we are not, we need nuclear.
I don’t think I’d buy uranium right now (Japanese demand at least will fall for a while) but I’d keep an eye on the battered big stocks (think Cameco) and I am tempted to look further into a small US-listed stock called Lightbridge. Its products aren’t yet in commercial use but it is working on a thorium-based nuclear fuel. Thorium is more plentiful and much cheaper than uranium. It is also much safer – something which, under the circumstances, might make it look pretty good to those planning new power stations (ie everyone).
• This article was first published in the Financial Times