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

What drives Australian versus global equity performance?

How did you go? Australian and global stockmarket winners and losers

banner

Most viewed in recent weeks

400th Edition Special: 45 of the best investment ideas

Over eight years since February 2013, Firstlinks has become a leading financial newsletter, publishing thousands of articles from hundreds of writers. To mark this milestone, 45 experts have joined the celebration for our 400th edition bringing their best investing ideas for the next few years.

Four bubbly market pockets show heightened risk for investors

At the top of every market, there are signs that investors look back on and say the excesses were obvious. While many parts of the market are fairly valued, here are four bubbles which show irrational exuberance.

Turning point: the 2020s baby boom retirement surge

Every week, 2,500 Australians retire, or at least, reach the age of 65, and 2021-2027 will represent the peak years of the baby boom retirement surge. Longevity of life comes with dangers and opportunities.

Hume and Frydenberg reset super with two buzz words

The solutions to retirement problems are obvious. All we need are 'efficiency' and 'flexibility'. Learn what these two words mean and the future of superannuation policy is clear. Just don't tell Paul Keating.

How long will my retirement savings last?

Many self-funded retirees will outlive their savings as most men and women now aged 65 will survive at least another 20 years. Compare your spending with how much you earn to see how long your money will last.

The world in 2030: Six investing tips for the next decade

Six portfolio managers look at how life may change by the end of the decade and how shifting trends are influencing their investment decisions. It's an optimistic view of the world in 2030 as a better place.

Latest Updates

Retirement

How long will my retirement savings last?

Many self-funded retirees will outlive their savings as most men and women now aged 65 will survive at least another 20 years. Compare your spending with how much you earn to see how long your money will last.

Property

Why you can't invest in residential property on the stock exchange

Residential property attracts little interest from institutional investors and the listed market. Here are three reasons why retail investors have an advantage over well-resourced institutional investors.

Investment strategies

Three charts on the surprising rise of Australian retail investors

It may surprise even industry insiders that over 30% of all trading on Chi-X comes from retail brokers. What is the growing influence of retail investors on Australian stock exchanges and who are they using?

Investment strategies

Five reasons why EM equities could power ahead in 2021

A broader rebound beyond tech companies is likely to accelerate. Structural reforms may regain momentum after COVID and a lower risk premium is warranted for emerging markets equities compared with prior crises.

Superannuation

Consumers need an effective super performance test

Fund performance varies over time. A fund may have strong capability and perform well over time, but it may fail the performance test at some point. The YFYS reforms create unwelcome and unintended consequences.

Strategy

Unlimited potential: innovation wrap for March 2021

This month's look at innovations changing the world explores computer chips, cryptocurrencies, renewables, cybersecurity, robotics, mobility, alternative foods, finance ... there is no limit to human ingenuity.

Superannuation

My 'purpose of super' is probably not yours

One problem with defining a single and universal purpose of superannuation is that people have contributed to super for years, even decades, with different ideas and intentions.

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.