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

Buy the dips?

The ASX is full of old, stodgy, low-growth companies

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Latest Updates

Economy

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Investing

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Property

Australian house price speculators: What were you thinking?

Australian housing’s 50-year boom was driven by falling rates and rising borrowing power — not rent or yield. With those drivers exhausted, future returns must reconcile with economic fundamentals. Are we ready?

Shares

ASX reporting season: Room for optimism

Despite mixed ASX results, the market has shown surprising resilience. With rate cuts ahead and economic conditions improving, investors should look beyond short-term noise and position for a potential cyclical upswing.

Property

A Bunnings play without the hefty price tag

BWT Trust has moved to bring management in house. Meanwhile, many of the properties it leases to Bunnings have been repriced to materially higher rents. This has removed two of the key 'snags' holding back the stock.

Investment strategies

Replacing bank hybrids with something similar

With APRA phasing out bank hybrids from 2027, investors must reassess these complex instruments. A synthetic hybrid strategy may offer similar returns but with greater control and clearer understanding of risks.

Shares

Nvidia's CEO is selling. Here's why Aussie investors should care

The magnitude of founder Jensen Huang’s selldown may seem small, but the signal is hard to ignore. When the person with the clearest insight into the company’s future starts cashing out, it’s worth asking why.

Sponsors

Alliances

© 2025 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. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. 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.