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Becket: The undervalued market no one is buying

06 May 2014

Psigma’s Tom Becket says the bears are wrong about Japan and he is putting his money where his mouth is.

By Thomas McMahon,

News Editor, FE Trustnet

Japanese equities are now at extremely attractive valuations, according to Psigma’s Tom Becket, who says he is increasing his overweight to the country in the face of the consensus view.

ALT_TAG Becket (pictured) says that most investors have decided that the Japanese market must be expensive after the shot in the arm given to it by Abenomics’ quantitative easing.

However, the strong growth in earnings the country has seen means it is now looking cheap in P/E terms, he says, and the outlook is more positive than the market appreciates.

“It was good for a while. I should have known it wouldn't last. For once I was one of the cool kids, not the awkward outcast picked last for teams. But now, as was always likely to be the case, I have been banished from the consensus and I am once again the strange contrarian,” he said.

“Here are some of the consensus views on Japan: Abenomics has failed, you should avoid Japanese equities as there are no catalysts, Japanese shares are expensive after last year's fireworks, the consumption tax rise is 1997 all over again.”

“Here are the “awkward one's” responses: the changes in Japan over the last eighteen months have been (in Japanese terms) extraordinary and far-reaching. Abenomics is working and structural reform is taking place.”

“I couldn't care less about catalysts. Look for value opportunities – Japan is one. Focus on the corporate earnings that remain solid.”

“Japanese equities are as cheap as they ever have been against US equities. They are also cheap in a global context.”

“They are also cheap on a historic basis. Finally, they are cheaper than they were before the advent of Abenomics. Within the Japanese market, banks are as cheap as they ever have been versus the wider TOPIX index.”

“The issues around the consumption tax rise in 1997 were hugely amplified by domestic issues (the banks were bust) and exogenous factors (Asian financial crisis anyone?).”

“The Japanese economy is now strong enough to withstand the rise and this is borne out by anecdotal evidence from the likes of Fast Retailing, the Japanese retailer.”

Data from FE Analytics shows that the Japanese market is down 14.85 per cent in sterling terms since its peak last May as the UK market has made slight gains.

Performance of indices over 2yrs

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Source: FE Analytics


For investors who hedged their exposure to the Yen shares their Japanese investments peaked again in January, but are now down 8.32 per cent from those levels, and Becket says a buying opportunity has opened up.

Performance of index in yen terms

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Source: FE Analytics

“Japanese equities are now outstandingly cheap,” he said. “The recent falls have offered investors who missed the boat last year the chance to benefit from this great growth opportunity and we are increasing our Japanese overweight.”

“We are focussing on funds that like the banks, property and consumption names, which have performed appallingly this year, because Abenomics is finished (obviously), and see them as one of the best opportunities across all global financial markets.”

Becket has proven to have a decent ear for Japan during the recent period of change. He was one fund-buyer to call last May’s top correctly, telling FE Trustnet on 20 May that it was time to sell. The market fell on 22 May.

Then back on 6 August he predicted there was more to come in the country. On 30 August the market began a run which saw it make over 19 per cent by January.

Becket reminds investors that few saw the dramatic changes of the last couple of years coming, as it seemed hard to imagine Japan would break out of its vicious cycle, but change did occur.

“I remember back two years ago, sitting jet-lagged, hungover and sweaty (only partially alcohol-related, Tokyo is very hot in the summer) in Lazard's Japan offices discussing the outlook for the market with a fund manager there,” he said.

“He didn't know what would change Japan (OK, let's use our hated 'catalyst' word) but he agreed that change was coming and the effects on Japanese stocks would be mighty.”

“Something was about to break and within a few months he was right. If we had drawn up a list then of Japan discussing the Trans Pacific Partnership, a material shake-up of the sleepy stooges at the Bank of Japan, the adoption of super-charged QE, the embarkation upon a path of corporate reform, the writing a Stewardship Code for equity holders to take management to task, a big overhaul of the omnipotent Government Pension Investment Fund (GPIF - who are set to increase their domestic equity allocations shortly, in our view), the creation of a new equity index focussing on RoE, the introduction of Japanese ISAs and growth in corporate profits of over 70 per cent, I would have been rightly committed.”

“But the above has all happened. If I was then to suggest that Japanese equities would de-rate by 20 per cent over the period that they made all these enhancements, I would surely have been laughed at (even harder than is typically the case).”

“However, this is exactly what has happened. Yes, the market has gone up a long way, but so have earnings, contrary to the experience of many other global equity markets (such as the US) that are so en vogue.”

He says that the catalyst for a further leg up could come from the overhaul of the government pension fund.

This could lead to a huge wall of money coming into Japanese equities, he says, pushing markets up. However, he warns against trying to time your entry to the market.


“If you want a catalyst, the GPIF news is potentially huge and has been glossed over by investors who obsess with the lack of recent downward momentum in the yen,” he said.

“I don't care if we are all by ourselves. If investors wait for the catalysts they may well miss the chance.”

“I might still be the proverbial leper for many years to come, but this trade will be good for a while longer.”

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.