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Japan Stocks Cheaper Than US, but Strategists Are Wary

Wednesday, 6 Jun 2012 | 3:47 AM ET

Japan stocks, which have over the past five years been more expensive than American stocks, are now trading at lower price-to-earnings ratio than the S&P 500 index. The country’s economy is also growing faster than the U.S., yet strategists are not suggesting investors snap up Japanese equities.

Tokyo Stock Exchange
Hiroshi Watanabe | The Image bank | Getty Images
Tokyo Stock Exchange

Naomi Fink, Japan strategist at Jefferies Group in Tokyo, said external risks such as the global economic slowdown and the European debt crisis will continue to weigh on Japan’s Topix.

“Until that remedies itself, I don’t think there’s going to be reason for much of an upturn in the Japanese market,” she told CNBC. “So it’s hard to recommend people to go long on Japanese stocks.”

After falling to a 28-year low on Monday, Japan’s Topix is trading at 11.4 times 2012 earnings versus 13.7 times for the S&P 500 . Over the past five years, the index has traded at 15.5 times earnings compared to 14.35 for the S&P 500.

Not only are its stocks cheaper, Japan’s economy grew 4.1 percent in the first quarter, the fastest rate among big industrialized nations and much better than the 1.9 percent growth for the U.S. economy and zero growth for the euro zone during the same period.

In recent days, Japanese stocks have rebounded on signs that the European Union would bail out financial institutions in the region and avert a banking crisis. But Benjamin Collett, head of Japanese equity at Louis Capital Market in Hong Kong, says the market is on a firm downward trend, though there could be short-term rebounds.

“We should stabilize between 8,250 and 8,500 on the Nikkei 225 ,” he said. “Right now, there are ways to make money in this market, but you have to trade small and be quick. Otherwise, you get better odds at the casino.”

Not everyone is so bearish. Nicholas Smith, director and strategist with CLSA in Tokyo, said he sees more value in Japan than in Europe or the U.S. After the declines on Monday, three-quarters of stocks on the Topix are trading below the book value of their assets, he noted.

“Over half the stocks were trading below cash on the balance sheets, which is like wandering into the store and finding there are cash-back coupons on the wine bottles that are greater than the sticker prices of the wines,” Smith said. “You're being paid to walk off with their wares; ‘One wine cellar to go please.’ ”

Smith said Japanese assets should be more attractive than those in U.S. and Europe because firms on the Topix are forecast to report "sparkling" earnings growth of 62 percent this year.

However, Stephen Davies, CEO of Javelin Wealth Management in Singapore, said he would not be looking at Japanese stocks despite the low valuations because of longer-term worries about the economy.

“The Japanese economy looks relatively moribund and you’ve also got that problem with demographics which is advancing by the day,” he told CNBC Asia’s “The Call,” referring to the country’s aging population and rising health-care costs. “If we look at it, I think we’ve still got good stories coming out of the U.S., even (though) growth is looking a bit more anemic than first appears the case. If the markets are looking weak, I have got a longer list of things I would be wanting to increase weightings to rather than starting off in Japan.”

—By CNBC’s Jean Chua.

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