What the Japanese paradox tells us about the global industrial cycle

DORVAL'S MACRO CORNER
"Adapting economic knowledge to market realities and breaking free from the tyranny of indices"
François-Xavier Chauchat
Member of the Investment Committee. Macroeconomic framework and asset allocation.
Dorval’s Macro Corner (March 2019)

The most recent news continue to paint a bleak picture of the global industrial sector, but after 15 months of slowdown, it is reasonable to believe that the trough of the global manufacturing cycle should not be too far away. Investors will remain nervous as long as they see no evidence of recovery, but friendly monetary policies should help to limit their anxiety.

If the recovery scenario materializes, the Japanese stock market looks particularly attractive. With a median P/E of around 12 (excluding financials), Japan is now by far the cheapest of all developed markets. Japan’s undervaluation contradicts the deep-rooted belief that equity valuation has been kept artificially high by central banks’ action. If that was the case, then how can Japanese equities be so cheap when the Bank of Japan continues with its policy of massive quantitative easing and is now top-10 shareholder in 40% of Japan's listed companies?

One key reason for Japan’s record low equity valuation is that its market has a much more extensive range of industrial companies than other countries. Thus, the depressed valuation of Japanese equities is telling us a lot about the extreme level of investors’ anxiety on manufacturing and trade. Along with other cyclicals in Europe and Asia, Japanese export champions should strongly rebound when the global industrial cycle begins to recover, or even before if a US/China trade deal is concluded.

 

Download the Dorval’s Macro Corner of March 2019 in PDF

 

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