Focus on Asia – Japan, Land of the Rising Equities?

This week Investment Europe is focusing on how various asset managers approach investing in Japanese equities. We look first home-ground player Sumitomo Mitsui Trust Bank, and the manager of its equity department Shigeo Mito.

One argument often mentioned not to invest in Japan is an apparent lack of catalysts to realise equity undervaluations.

Shigeo Mito (pictured), equity investment department manager at Sumitomo Mitsui Trust Bank, says this has changed.

He points to 20% expected earnings growth this fiscal year. Sumitomo Mitsui expects 25%, but this will vary widely by sector. Materials firms could see 10% growth, while estimates for manufacturing earnings growth are around 30%.

However, this is not yet reflected in prices. Almost three quarters (71%) of companies are trading below book value, and on only one occasion since at least 1990 has this proportion been higher.

The Topix’s price to book ratio (0.89) is lower than for indices including S&P 500, Dax, Cac 40, FTSE 100 and Hang Seng.

“Everyone wants to price in (expected earnings) information, but problems from outside Japan – primarily Europe – mean they have not,” Mito says.

He notes fewer than 10% of Japan’s exports ship directly to Europe, and if the ‘worst case’ happens in Europe, 7% of total Japanese earnings growth will be harmed.

China has now overtaken the EU, and US, as an export destination for his homeland, which is useful as the recurring profit margin for Japan exports to China / ASEAN nations is over double that of their exports to the US.

However, Japan’s fortunes are still linked closely to the US, Mito says, “with some of the 50% of Japanese exports now going to Asia then being forwarded to the US, such as cars.”

Some car makers had offshore manufacturing hit by Thai floods, and exports from this sector is one key theme in Sumitomo Mitsui’s fund.



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