Edison Exhibits – the Japanese market

Published on 13-11-2019 08:32:29

All-cap versus mid- and small-cap Japanese equity index total returns (in £)

Forward P/E valuations and dividend yields (x unless stated)

Last

High

Low

10-year
average

Last as
% of
average

Dividend
yield (%)

Japan 14.3 20.5 10.5 13.8 104 2.3
UK 12.7 15.7 8.5 12.6 101 4.2
US 17.9 19.0 11.2 15.4 116 1.9
Asia ex-Japan 13.6 16.3 10.5 12.9 106 2.5
World 15.2 16.3 9.8 13.6 112 2.5

Source: Refinitiv, Edison Investment Research. Note: Valuation data as at 1 November 2019, based on Datastream indices.
 
The charts show Japanese equities have provided solid returns for UK-based investors over the past five to six years, with smaller and mid-cap stocks mildly outperforming the broad-based Tokyo Stock Price Index (TOPIX).

While this has in part been boosted by the relative weakness of sterling since mid-2016, it also represents something of a return to favour for the world’s second-largest developed stock market, after the best part of two decades in the wilderness. Japanese equities are not immune to current global macro headwinds, such as the US-China trade war (a particular worry given many Japanese companies manufacture in China) and the slowing economy, but their relatively low valuation versus world markets provides a measure of support.

Currently only the UK – which has been deeply out of favour because of the prolonged period of Brexit uncertainty – is more cheaply valued on a forward P/E basis compared to its 10-year average. Furthermore, corporate governance reforms in Japan are boosting returns to shareholders through measures such as share buybacks and dividend payouts. As a result, the historically lowyielding market now has a dividend yield higher than the US, and only a little below the regional and global averages, providing a further underpinning for total returns in what may continue to be a volatile period for share prices.

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