The Wall Street Journal-20080117-Cheap Shares Fail to Entice in Japan- Worries Over Exposure to Global Slowdown Sinks Nikkei
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Tokyo -- Japanese stocks are cheaper than they have been for decades. So why are so few investors interested in buying them?
Driving stocks lower is a combination of worry that Japanese shares will be disproportionally hit by a slowdown in the global economy and continuing concern that managers at Japanese companies aren't as sensitive to their shareholders as those at U.S. and European companies are. The slow pace of overhaul in the world's second-largest economy is also weighing on shares.
Yesterday, the benchmark Nikkei Stock Average fell more than 3.3% as concerns continued to build that the U.S. economy -- which takes in slightly less than 25% of Japanese exports and helps power many of Japan's other markets -- might slide into a recession.
So far this year, the Nikkei has fallen nearly 12% and now stands at 13504.51 -- a two-year low. The Dow Jones Industrial Average, by comparison, is off 6%.
The latest slump in the Japanese market, which has fallen irrespective of what stocks in the U.S. or elsewhere have done for the past three months, is damping optimism that shares here would rise as investors looked for bargains. The Nikkei's price/earnings ratio, which compares the price of a stock to its earnings, is now just below that of the S&P 500.
Those low valuations were supposed to lure foreign investors. But so far that hasn't happened. A Merrill Lynch survey of fund managers released yesterday shows that investors in Japanese equities were turning negative. The percentage of fund managers who expected earnings at Japanese companies would improve during the next 12 months fell by a net 29% and the percentage who expected Japanese companies to post earnings growth of more than 10% fell by a net 56%.
That type of sentiment helps explain why foreign investors, who own slightly less than 30% of the Japanese stock market but account for more than 60% of its trading volume, in December sold 725.9 billion yen ($6.79 billion) more in shares than they bought, according to data released by Ministry of Finance yesterday.
Since mid-September, stock sales by foreigners have exceeded purchases for every week save one on a three-month moving average, according to an analysis by Patrick Mohr, a strategist at Nikko Citigroup.
"Foreigners are giving up on Japan," Mr. Mohr says.
Japanese shares, he says, are particularly sensitive to concerns about a global economic slowdown because the stock market is heavily skewed toward companies that make a good chunk of their profit in overseas markets.
The recent swoon has taken shares of some of the country's biggest, strongest companies lower even though many Japan-listed corporations are expected to post a sixth-consecutive year of profit growth in the fiscal year ending March 31.
Among the companies that have been whacked: Car giant Toyota Motor, which is down 12% so far this year; electronic-parts maker TDK, down 20%; and engine-maker Kubota, down 19%. In part, they are getting hurt by a stubbornly strong yen, which erodes the value of overseas revenue when that is returned to Japan.
Many investors say Japanese companies are now so inexpensive that value investors, who buy stocks because they think the market has priced them too low, will start to prowl for bargains. Japanese stocks trade at a price/book value ratio, which compares a company's stock to the value of its assets, of a little above 1.5 times. U.S. stocks trade at about 2.5 times.
"Japan represents considerable value relative to other markets," says John Alkire, a fund manager at Morgan Stanley Asset & Investment Trust Management. Mr. Alkire says he believes other investors will catch on to that fact later this year and help push shares higher.
Some attitudes have already begun to change. Several big global investors, like sovereign-wealth funds from Qatar and China, have stated recently their intention to invest in Japanese stocks. In late 2007, Swiss banking group UBS recommended that investors raise their exposure to Japan to equal its global percentage.
Still, some analysts say that until Japanese companies get serious about rewarding shareholders, any sort of strong rally is unlikely to last.
Many Japanese companies have bolstered cross-shareholdings -- mutually held stakes by business partners -- to protect themselves from unwanted takeovers. For example, car-parts maker Kasai Kogyo formed cross-shareholding arrangements with several other auto-parts companies. Such cross shareholdings are bad for share prices because they make it difficult for the company to be taken over, a move which normally requires a premium to be paid.
Additionally, more than 400 Japanese companies have adopted poison pills, plans that dilute the holdings of an aggressive shareholder who might seek control. Those plans hurt share prices by making it unlikely a potential acquirer would bid for a company and by raising the specter of many new shares hitting the market.
Analysts say Japanese corporate preoccupation with defense measures has weighed on the overall market.
Europe and Asia
Feel the U.S. Pain
More worries about the U.S. economy plagued markets in Europe and Asia yesterday. Major markets in Asia tumbled, while European stocks fell for the fifth time in six sessions.
In LONDON, the U.K.'s FTSE 100 index sank 1.4% to 5942.90, the first time it has closed below 6000 since mid-August. France's CAC 40 Index slipped 0.5% to 5225.39 and Germany's DAX shed 1.3% to 7471.57.
In HONG KONG, the big drop in the Hang Seng means the Hong Kong market now has fallen the furthest in the region this year, at just more than 12%.
In HANOI, shares jumped 4.6% after government agencies moved to prop up the sagging Ho Chi Minh Stock Market, underlining official concern about risks to the country's strong economic growth.
