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Good morning. Inflation remains a matter of hours, days, weeks, months and years. But sometimes we all need a break. So Unhedged has taken a day off to Japan and sent a postcard found below. We are very excited to hear from readers who believe that there is money to be made in Japanese markets. Send to email address [email protected] and [email protected]

A country where investor values ​​are going to die

Here is a cheerful little board:

The Japanese stock market has almost tripled in nine years! Although I find it strange to write that phrase, the Japanese market has been the joke of Wall Street since at least 1990, when that country’s epic bubble burst.

For 30 years, brokers and fund managers have been examining one table or another as to how great companies Japan trades at low valuations. International investors have taken part in Japanese lethal groups and pushed for Western-style shareholder reforms. A few have made money. Most have received punches in the face and sent packages.

And the joke is not quite over yet. Turn that happy little chart into a dollar from the yen and add the S&P 500 and MSCI World, and you get this unfortunate little chart (all three are redirected to 100):

And, of course, the longer-term story for international investors in Japan has been tremendous. Here is the last table again, this time in 1975:

Long experience and recent performance have left global investors very worried about making big bets in Japan. This Bank of America graph (in small light blue lines) shows the net percentage of overweight managers in Japan (i.e., the percentage of those who are underweight minus the percentage of overweight). The dark blue line is a measure of Japanese stock performance against global dollar-based stocks:

A net 7% of managers say they are overweight in Japan (current US and European figures are 16% and 34% respectively). The multi-year enduring interest that began in 2012, with the start of Abenomics, has disappeared.

The poor performance, of course, has left the appearance of the Japanese stock attractive. Nearly half of Topix trades at less than one times the book value (and more than half of the index has no net debt). Below are the value / Ebit ratios of Topix and S&P. The Japanese discount is now over 50 percent of the five-year average:

But, again, this is an old story. The ratings are a mermaid song that has led generations of investors to a value trap: it became relatively cheaper with a relatively cheap market. But at some point things may change, and the better (if not the better) performance of Japanese stocks in recent years suggests that tectonic plates are moving.

The last strong performance, but not even excellent, comes with a caveat: the state was very protected. Since 2013, the Bank of Japan’s quantitative easing program includes the purchase of funds traded on an internal stock exchange. The BoJ now has 36 36 million ($ 313 billion) in shares (or about 5 percent of the total capitalization of Tokyo exchange companies). But the bank stopped buying ETFs this spring.

In addition, in 2015, the giant Government Pension Investment Fund said it would double its allocation to Japanese shares by 12%. The reassignment is over. Last year, 25 per cent of the fund, or ¥ 47 million, was in internal shares.

Therefore, the demand previously given by the BoJ and GPIF should be replaced if the Japanese shares take another leg. The obvious candidate is international buyers looking for value. But they need an engaging narrative to buy. Valuation is never a sufficient reason to buy.

Pelham Smithers of Pelham Smithers Associates says there is a very strong market on the Japanese stock market. “Aggregate performance has been very poor, but large parts of the market have performed excellently,” he says. Smithers cites the high performance of several actively managed Japanese funds as evidence (to choose one example, the Baillie Gifford Japan Trust has estimated 440 percent in a decade, in pounds).

But can the market function in its entirety in the end? “The question is whether they’ve dropped enough, the blows that can’t hold the market any longer, or the world-beaters have become too expensive?” Smithers says. He believes the answer to this last question is no, citing Tokyo Electron as an example, an excellent semiconductor company that sells at a great discount to US members.

Another case for buying is that, after years of resistance, Japanese corporations have a slightly (slightly!) Higher priority on shareholder value. The most notable example of this is the breakdown of Toshiba, which could lead to the sale of one or more of its units to private capital. It creates hope that other sclerotic conglomerates will be broken.

However, Toshiba may be a special case because of the history of the scandal, its large foreign ownership and the political sensitivity of its nuclear business. According to Mizuho Securities, since the introduction of fiscal incentives for spin-offs in 2017, only one non-Toshiba company has taken advantage (Koshidaka Holdings, “karaoke room operator [and] fitness studios for middle-aged women ”).

However, Toshiba isn’t entirely just shaking things up, as my colleague Leo Lewis pointed out to me. OK Corp., a supermarket operator, is in a bidding war with one rival, H2O Retailing, with another, a Kansai Super Market. Shinsei Bank is fighting SBI against internet mediation. A Singapore hedge fund activist is getting in the middle of an agreement between energy company Eneos, one of its subsidiaries and Goldman Sachsen.

For those who expect a more complete embrace of shareholder capitalism in Japan, like the Unhedged, they are just clear hopes. But change needs to start somewhere.

A good read

New York University PhD student Francesco Furno has a new work with compelling reflection (and abbreviated tweetstorm) Comparing tax cuts by John F Kennedy and Donald Trump. He believes most of Trump’s tax cuts went to shareholders, while Kennedy’s focused on growth and investment. Why? Furno linked them to the structural differences in the two legislations. Not all corporate tax cuts are born equal.

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