Focus on Asia – Japan, Land of the Rising Equities?
This week Investment Europe is focusing on different managers’ approaches to Japanese equities. Today we look at at Alliance Bernstein’s value approach.
Nicholas Davidson (pictured), senior portfolio manager at AllianceBernstein, says his firm’s value approach to investing works best in Japan.
The process on its Yen 54,000m Japanese Strategic Value fund, launched in 2005, applies fundamental analysis, taken over the long term, to metrics such as a company’s profitability, price momentum, balance sheet accruals to gauge earnings quality, and price to book.
Since 1971 such analysis seems to have been better rewarded in Japan than in other developed world equities.
An examination of the annualized performance of the most attractive quintile of stocks versus the least attractive quintile – on price/forward earnings, P/B, and price to sales – shows a bigger divergence in Japan than global developed markets. Industrialised nations’ markets’ stocks did better on P/E and price momentum.
The value is certainly there – by June this year the Topix had lost over half its value compared to the 1717 level at the start of 2000. Additionally, the PE ratios are cheaper than any time since the 1970s, and P/B is cheaper than many other major markets.
“Lower valuations generally are suggesting a lot of Japanese companies are trading around their break-up value, implying there is no earnings growth potential – which is not the case.”
Davidson adds: “The macro environment for Japan equities has improved and Japan companies are now in a position to reward shareholders more than they have in the past. There are under-appreciated earnings growth opportunities now that investors outside Japan overlook. It has been what has happened in Europe that has led people to run away.”