One of the markets caught up in global trade fears, that continues to perplex investors, is Japan. The Japanese markets are trading near their lowest valuation levels in the last 30 years, supported by increased profitability, better returns on capital and improving profit margins. A recent article in The Wall Street Journal by Mike Bird summarizes sentiment and the environment nicely:
“Something strange is going on with corporate Japan: Profits have soared. . . . Yet foreign investors, by and large, aren’t that interested. . . . After decades of stagnation, profitability has soared under Prime Minister Shinzo Abe’s economic revival program, dubbed Abenomics. Profit margins at nonfinancial firms hit a record 7.7% in the second quarter. This ratio, which compares earnings before interest payments and taxes with sales, rarely topped 4% until a few years ago”.1
While Japan tends to trade with its currency and global macro sentiment, this market behavior masks some strong underlying trends in corporate governance and profitability.
One element of Abenomics involved the creation of new stock indexes that encouraged a focus on return on equity (ROE). Companies have responded, increasing both dividends and buybacks and better managing the cash on the “bloated balance sheets” (which are often cited as a reason to stay away from corporate Japan).
Below, I review some of the key fundamental attributes of the WisdomTree Japan Dividend Index (which also serves as the underlying for the WisdomTree Japan Hedged Equity Index) to show how globally oriented Japanese companies are trading on valuation and a multiple bases.
The median price/earnings (P/E) ratio over the last 12 years was 13.9x, and the latest P/E ratio was 11.8x, a 20% discount to the median. These valuation levels are similar to the depression during the financial crisis 10 years earlier, before earnings collapsed.
