Starting valuations help to determine the likely upside potential for in investment – the more mispriced, the higher the upside potential may be.
Confirming that value exists is vital. The value of the company may be determined by the returns the company can generate on a sustainable long-term basis.
Improving trend fundamentals in Japan is underappreciated
Improving trend fundamentals at the Japanese company level, is a significant driving factor in the longer term re-rating for Japan.
Corporate Japan’s strong earnings growth have surprised to the upside.
For example, since 2013 there have been eleven straight quarters of upwardly revised earnings, each time beating the market’s expectations.
In aggregate, the long process of balance sheet repair in Japan is well and truly over.
Arguably for many companies balance sheet health is ‘too strong’, which points to a level of inefficiency.
In fact companies are now focused on improved capital efficiency; generating significant cash flow; and applying renewed balance sheet strength to pursue sensible expansion strategies. This fundamental change remains underappreciated in the share prices for many Japanese companies.
The Japanese equity market is being supported by prospects for higher pay-outs and earnings growth.
There is now a strong economic imperative for companies to improve capital efficiency encouraging shareholder oriented behaviour and positive use of cash. Share buyback announcements and dividend hikes continue to trend higher.
In addition, the introduction of the new Corporate Governance Code may encourage a move toward higher pay-out ratios that started in 2014.
There is admittedly ample scope for pay-outs to improve. However this is an example of positive structural change we observe in corporate behaviour which is supportive for sustainability of returns and therefore the longer-term rerating for Japan equities.
There is a range of unexpected investment opportunities in Japan – if you are willing to avoid the herd, let cheap share prices take you to opportunities, confirm that value exists and be patient.
