Japanese High Beta (Cyclical) Trading at a Discount to Low Beta (Defensive)
Source: SMBC Nikko Securities Inc., 8/31/1995 to 7/31/2016
TOPIX 500 universe was divided into tertiles (three parts) by 60-month adjusted beta versus TOPIX and the median price/book was calculated for both high- and low-beta groups.
In the world of Wall Street jargon, perfection can be a bad thing. Companies miss earnings due to “perfect storms,” and overvalued stocks are said to be “priced for perfection.” A look at cyclical areas in Japan suggests contradictions may also be seeping into valuations.
As the chart shows, when compared to Japanese stocks in defensive areas, high beta (i.e. cyclical) stocks are trading at a discount not seen since the aftermath of the financial meltdown in 2009. However, the Japan of 2016 is much different than it was then. Since the Great Recession, the government has enacted policies to encourage economic activity. Most recently, in July, Prime Minister Shinzo Abe unveiled a new 28 trillion yen stimulus package, including funds earmarked for direct government spending. We believe these actions make the outlook for cyclical stocks much brighter than was the case seven years ago, when these types of high beta names were trading at similar valuations.
As we recently noted, there is much to like about the Japanese market environment. Quantitative easing, demographics, and shareholder friendly actions by some of the country’s largest companies make investing over the long-term appealing to us. We believe valuations for cyclicals is more validation in the case for Japan.