Last month, investors in London and on Wall Street cheered all-time highs for the UK and US stock markets. Anyone who celebrated the same feat in Tokyo is probably long retired. Japan’s benchmark TOPIX index peaked at 2,885 in December 1989 and is currently standing at roughly half that level (1,470), though it has been much lower in the intervening years. Unlike investors in the US and UK, holders of Japanese equities have painful memories.
There are, however, striking differences between Japan’s stock market 30 years ago and today. The most important of these, in our view, is valuation. In 1989, the TOPIX index was trading at a price-to-earnings ratio of c60x, more than three times the multiple on which it now trades. Unsustainably high valuations are part of the explanation as to why the market has done so poorly since 1989. Current valuations suggest that its experience might be better looking forward. Below, we explore this prospect and present our case for increased allocations to Japan.
As you will no doubt be aware, a UK general election has been called for 8 June as the Conservative government seeks a stronger mandate for the impending Brexit negotiations. The immediate impact has been a strengthening of sterling, as currency markets anticipate a stronger negotiating hand for the government, and a commensurate retreat in UK large-cap stocks – as currency strength takes its toll on the likely sterling value of overseas earnings. We will of course be monitoring developments closely, and increased volatility may offer opportunities in the coming weeks.
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