Japan – a contrarian take. are we in the embryonic stages of a multi decade bull market?

Japanese stocks are extremely cheap selling for up to half their book values. Rarely do high quality multinational companies with global earnings become subject to pricing at these cheap levels. 

The argument about Japan’s population halving in the next 50 years is, quite frankly, pure nonsense. Yes the population is getting older and yes it is declining gradually with a below average birth rate, but “self preservation is a powerful motivator”.  When has a nations’ birth rate not risen to the occasion throughout history? We can’t think of one single example. Maybe Ireland and Scotland in the 1700 and 1800s.

But that is not why we believe tthat high quality multi-national Japanese companies which derive earnings from all over the world are inordinately cheap. Most nations in the developed world have had to deal with recessionary conditions since the Great Financial Crisis, but only last year Japan had to also navigate through the Great Eastern Japanese Earthquake (as they refer to it). This knocked the economy with effectively a second shock, and as Japanese companies report their numbers for the financial year, that has obviously had an impact.   

In the United States – which has seen significant deleveraging – the population hold roughly 15% in cash, bonds and liquid investments. In Japan after a 22 year bear market the population holds roughly 55% in cash, bonds and liquid investments. These investments pay virtually nothing, yet the yield on most Japanese stocks is now approaching 5%. 

The public have been completely debilitated and conditioned by the bear market in Japan’s stock market with the Nikkei more than 80% down on the peak reached in 1990 as the chart above illustrates – more than 22 years ago! Followers of Kondratieff wave theory will see 5 distinct waves too – the 5th wave being typicall a completion pattern.

The Japanese no longer believe in equities, and in fact they stopped believing some time ago. That is why they are prepared to ignore 5% yields and phenomenal value that is now offered in some of the world’s leading multinational companies and instead accept almost nothing in return through holding cash. 

Think about that for a minute. Secular multi decade bull markets are born during these types of depressed conditions. 

Sony sells for around half book value. This type of pricing occurs once in a blue moon for high quality, diversified multinational companies. 

You cannot be anything other than a raging bull on Japanese equities at current prices. They are, in our opinion, a coiled spring and with the earthquake now effectively flushed through the system, the banking sector cleansed and the prospects for the yen to now weaken with the safe haven trade unwinding, we should see the Nikkei rally strongly. Some will argue what’s the point if the market rallies but the yen weakens in domestic currency terms. Our argument is that the stock market itself will rally by a much greater proportion and more than offset declines in the currency. You can also hedge the yen too by selling it.

As a footnote, Japan’s stock market reminds us very much of gold back in the late 1990s trading at $250 an ounce. Japan is our 7th Conviction Buy at 8600.