Dan Loeb’s Third Point Japan strategy is poised for perfection (Part 8 of 9)
Relative value: Will multiple expansion spread to Asia?
The below graph reflects the great run in Japan’s Nikkei equity index during 2013 (the red line at the bottom). The new Prime Minister in Japan executed his policies on monetary and fiscal stimulus since 2012, and Japan’s equity markets have practically doubled since. However, since May 2013, the Japanese equity rally has stalled, while China and Korea also have flatlined. This article considers the prospects for rising valuations in Asia and in Japan with regard to Third Point’s Softbank and Sony.
Will Asian markets join the U.S. rally later in the year?
For the past 11 months, the Nikkei has flatlined—just like China and Korea. Meanwhile, the U.S. equity markets continue to rally, with growth stocks outperforming value stocks post-2008. In the USA, it’s hard to kill the long-term secular growth story, as the U.S. continues to surprise to the upside, despite the post-2008 crisis data and speculation that the U.S. would forever be mired in a “new normal” of low growth as an overdeveloped, post-industrial, developed market. Having doubled debt-to-GDP during the crisis, the U.S. might have looked like an emerging market debt-ridden basket case. So far, that outcome seems to have been avoided.
This article considers Japan’s prospects for a continued equity rally in light of macroeconomic developments, and the implications for Third Point’s investments in Japan’s Softbank and Sony. Perhaps the growing price-to-earnings ratio in the U.S. S&P 500 will translate into higher valuations in Asia as the year progresses and investors find relative value in Asian companies with strong growth prospects and lower PE multiples.
Can the U.S. sustain outperformance in 2014?
Given the cloudy international outlook in Russia and China, it might appear that investors are finding comfort in the U.S. dollar and US equities, while international markets, such as Japan, China, and Korea are receiving less attention. With the U.S. at record highs, it might take an interest rate spike and equity market drop to refocus attention on Japan’s lower price-to-book equities. With China and Hong Kong trading around ten times PE, Korea at 15, the U.S. at 18, and Japan at 20 times PE, perhaps Asian markets will gain richer valuations as the year progresses.
Given the macroeconomic changes in Japan, Japan’s valuation could rise as well, supporting both Softbank and Sony prices. Perhaps Asian markets are in a basing mode, though after considerable sideways price action, they could see increased valuation relative to the U.S.
To see how Japan, China, and Korea equity ETFs could be poised for better momentum in 2014, please see the next article in this series.
For an overview of the April 1 Bank of Japan Beige Book on Japan’s economic outlook, please see The Bank of Japan Tankan supports a 2014 Japanese equity rally.
Japan’s equity outlook
As 2014 progresses, investors could see a continued outperformance of the Wisdom Tree Japan Hedged (DXJ) and the iShares MSCI Japan ETF (EWJ) versus China’s iShares FTSE China 25 Index Fund (FXI) and Korea’s iShares MSCI South Korea Capped Index Fund (EWY). For further clarification as to why DXJ could outperform both EWJ and other Asian equity indices, please see Why Japanese ETFs outperform Chinese and Korean ETFs on “Abenomics.” Plus, as Japan pursues unprecedented monetary expansion and the U.S. Fed tapers its bond purchases, Japanese equities could also outperform broad U.S. equity indices, as reflected in the State Street Global Advisors S&P 500 SPDR (SPY), the State Street Global Advisors Dow Jones Index SPDR (DIA), and the Blackrock iShares S&P 500 Index (IVV).
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