Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 397

Is Australia turning Japanese? Watch these stocks

On 15 February 2021, the Japan Nikkei Index hit 30,000 for the first time since 1990. Media reports celebrated the milestone. However, we think it highlights the misery Japanese equity investors have endured for more than three decades. The Nikkei is still 23% below the all-time-high achieved in December 1989 at the peak of one the greatest equity bull markets in history. Since then the Japanese equity investor has endured an annualised capital loss of 0.2% and a paltry total return of 1.1% p.a. with dividends. 

How did this happen? Can it happen in Australia?

Why Japan has performed poorly

Our analysis indicates the three main drivers of the dismal equity returns in Japan include:

1. High starting valuations

2. Dilutive equity issuance, and

3. Mediocre profits growth.

First, the Japanese equity market traded on Price/Earnings ratio of 60x in 1989. At the time it was the most expensive market in the world, by far, and it is a valuation level US tech stocks achieved in the late 1990s bull market. Now the Japanese equity market trades on 23x and the derating over the last 31 years has been a 3% per annum drag on equity market returns.

The second largest contributor to poor returns has been dilution. While Japanese profits have grown by around 4.6% p.a. since the peak in the bull market, Earnings Per Share (EPS) growth has been a puny 2.8%. Much of this dilution has come from recapitalising the overly-leveraged banks. However, Japan Inc’s unwillingness to put equity investors first as stakeholders has led to an erosion of equity returns if it means not sacking employees or restructuring businesses.

Third, mediocre profit growth has contributed to poor returns, but we think this should not be over emphasised. Profit growth of 4.6% p.a. is only 2% lower than what we have enjoyed in Australia over the same period. We think much of the difference has been due to the less forgiving inflationary backdrop in Japan.

So it is de-rating and dilution which have been the biggest culprits of the lost decades for Japanese equity investors. It has been less about deflation and an aging of the population, in our view.

Watch the ridiculous prices and equity diluters

To avoid future lost decades, our work suggests equity investors will need to avoid stocks which are ludicrously priced and are also likely to be big shareholder diluters (that is, issue large amounts of capital when not required) in the years to come.

While we don’t see either for the entire Australian equity market (but we are still early into the current bull cycle), we can see parts of the market which could deliver painful shareholder returns over the long-term.

The buy-now, pay-later (BNPL) sector could be one area. The stocks here are exorbitantly priced with Afterpay trading on 250x EV/EBIT. Potentially dragging shareholder returns further could be the capital intensity of these businesses.  Credit providers have an insatiable appetite for new equity if they would like to grow. Afterpay, for example, has grown its share count by 20% over the last two years. Shareholders should expect further issuance to come. Afterpay just raised $1.5 billion in a convertible debt issue.

Another potential lost decade sector could be the infrastructure stocks. These companies are highly valued and are benefitting from low bond yields which keeps down their cost of capital. However, shareholders may have to endure dilution and de-rating in a world where bond yields push higher on a sustained basis.

While the potential for a lost decade should not weigh on short-term investor willingness to buy into these stocks, longer-term investors should avoid areas of the market that are turning Japanese. This is a sorry chart and set of numbers (ATH=All Time High).

 

Hasan Tevfik is a Senior Research Analyst at MST Marquee. This article is for general informational purposes only and is not a solicitation of any offer to buy or sell any financial instrument or to participate in any trading strategy.

 

RELATED ARTICLES

Winners and losers in sharemarkets, 2017/18

How to build a global equity portfolio

The next big thing: global markets and the emerging consumer

banner

Most viewed in recent weeks

Three steps to planning your spending in retirement

What happens when a superannuation expert sets up his own retirement portfolio using decades of knowledge? He finds he can afford much more investment risk in his portfolio than conventional thinking suggests.

Retirement income promise relies on spending capital

The Government has taken the next step towards encouraging retirees to live off their capital, and from 1 July 2022 will require super funds - even SMSFs - to address retirement income and protect longevity risk.

Finding sustainable dividend stocks on the ASX

There is a small universe of companies on the ASX which are reliable dividend payers over five years, are fairly valued and are classified as ‘negligible’ or ‘low’ on both ESG risk and carbon risk.

Among key trends in Australian banks, one factor stands out

The Big Four banks look similar but they are at fundamentally different stages as they move to simpler business models. Amid challenges from operating systems, loan growth and neobank threats, one factor stands tall.

Why mega-tech growth are the best ‘value’ stocks in the market

They are six of the greatest businesses ever and should form part of the global portfolios of all investors. The market sees risk in inflation and valuations but the companies are positioned for outstanding growth.

How to manage the run down in your income in retirement

The first of five articles on modern retirement income products that aim for an increasing pension that lasts for life and on average should not decline in real terms. They are not silver bullets but worth a look.

Latest Updates

Investment strategies

Who dares loses: Buffett on luck, taxes and a challenge

Imagine it is 24 hours before you are born and you can set all the rules: any political system, any economic structure, any social edifice. One catch: you don't know which of the nine billion people on earth will be you.

Investment strategies

Importance of remaining rational and why Bitcoin is worthless

The case for strong stock markets is convincing. The problem is that the case for a major correction (20% or more) in the next 12 months is also convincing. And why Bitcoin is absurd and defies logic in a market bubble.

Investment strategies

10 big ideas for 2021 - a midyear update

Last November, the heads of four investment platforms identified the key themes they anticipated would guide investment decisions in 2021. With the year half over, we see how they’ve played out and check the outlook.

Retirement

Four reasons many Australians will work until they're dead

Despite the maturing of the super system, 70% of retirees rely in part or full on the age pension. Access to pensions will become more restrictive and fewer people will have options such as a reverse mortgage.

Property

Economic recovery and its impact on commercial real estate

Globally, demand for quality industrial property has driven the strongest period of growth the commercial logistics sector has experienced in many years, but what's happening with office and retail sectors?

'Wealth of Experience' podcast - markets rinse and repeat

The next episode of Wealth of Experience with Graham Hand and Peter Warnes covers Top 20 stocks then and now, Brambles, defining retirement income, performance fees and Nick Griffin’s ideas and outlook.

Retirement

Reader Survey on retirement income

There has been an excellent response in reader engagement and comments to our recent articles and podcasts on retirement income. Tell us what you think in this short survey and the results will go to Treasury.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.