I’ve been tipping Japan for some time. It hasn’t been a good call.
Last year the Nikkei 225 was the worst-performing major stock market in the world, falling 11%.
Meanwhile the data coming out of the country is hardly uplifting – the economy shrunk in the second quarter of last year while deflation is still a persistent threat.
But I’m not going to abandon this one. Why? Because Japan is cheap and cheap by almost any valuation measure you care to use. And that is something that is going to make it look very special this year.
For far too long now cheap credit has allowed investors to ignore fundamental measures of value: they’ve chased assets higher, regardless of risk and regardless of price because they’ve known they’ll be able to sell them on alter to someone else for even more money.
But as money gets harder to come by, and investors are reminded that asset prices can go down as well as up, they’ll become more cautious, and start looking for ways to protect themselves.
Famed value investor Benjamin Graham tried to insure against falling prices, by only buying companies at below book value: he searched for companies which would be worth more than their market capitalisation if you shut them down and sold off all their assets.
You’ll not find many of those anywhere in the world these days – except in Japan. A full 40% of Japanese stocks trade at prices below their book value – the global average is more than two times book value. 2008 also looks like it will be the year of the yen’s big comeback.
The attractiveness of the ‘carry trade’ – where investors borrow in yen to invest in currencies with higher interest rates such as the New Zealand dollar – is fading fast and with the UK staring recession in the face, and the pound falling. So we can expect the yen to rise against the pound, hence boosting returns for UK investors buying Japanese assets.
There aren’t going to be many safe havens around the globe this year. Japan may be one of them – regardless of how long its economic recovery takes.
First published in the Evening Standard