Is now the time to buy Japanese stocks?
Ben Inker, head of asset allocation at value investor GMO, says it is. While the human cost of the earthquake, tsunami and nuclear disaster hitting Japan this month is obviously eye-wateringly high, he says investors must focus not on that dismal picture but on the long-term economic impact – which he says is unlikely to be very big.
However horrific the human cost, economically, most disasters are hard to spot in the data. GDP does not necessarily fall, and if it does, the bounce-back is usually quite rapid. Given the long duration nature of equities, where the bulk of value comes from the present value of dividends that will be paid 10 or more years in the future … we believe this event is unlikely to have a material impact on the long-term fair value of corporate Japan.
Adding to the case for Japanese equities, he says, is the valuation question. He contends that Japanese markets looked cheap before Friday’s quake – and with stocks there down as much as 20% since then, they now look even cheaper.
Contrast that with stocks in other markets, which Inker takes to be vastly overbought and, perhaps, headed for a collision with the reality that risk perceptions are rising:
The biggest concern for investors in our minds should be the fact that while this event is unlikely to itself drive the world into recession or financial crisis, equity markets around the world are expensive and the return to risk is low. Furthermore, there are many excesses of the previous credit boom that have yet to be fully purged from the financial system. While there is no fundamental reason why this event would reduce the fair value of global equities by a material margin, it could conceivably be the trigger for a broader rethink of risk taking. With global equities perhaps 25-30% overvalued, they have every right to fall significantly, with or without a large unforeseen event as a catalyst.
It is a right he evidently expects stocks to exercise sooner or later.
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