Japan: Far From Perfect

In the world of Wall Street jargon, perfection can be a bad thing. Companies miss earnings due to “perfect storms,” and overvalued stocks are said to be “priced for perfection.” A look at cyclical areas in Japan suggests contradictions may also be seeping into valuations.

As the chart shows, when compared to Japanese stocks in defensive areas, high beta (i.e. cyclical) stocks are trading at a discount not seen since the aftermath of the financial meltdown in 2009. However, the Japan of 2016 is much different than it was then. Since the Great Recession, the government has enacted policies to encourage economic activity. Most recently, in July, Prime Minister Shinzo Abe unveiled a new 28 trillion yen stimulus package, including funds earmarked for direct government spending. We believe these actions make the outlook for cyclical stocks much brighter than was the case seven years ago, when these types of high beta names were trading at similar valuations.

As we recently noted, there is much to like about the Japanese market environment. Quantitative easing, demographics, and shareholder friendly actions by some of the country’s largest companies make investing over the long-term appealing to us. We believe valuations for cyclicals is more validation in the case for Japan.


Past performance does not guarantee future results.

The statements and opinions expressed in this article are those of the presenter(s). Any discussion of investments and investment strategies represents the presenter’s views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. Any forecasts may not prove to be true. Economic predictions are based on estimates and are subject to change.

Investing involves risk, including the potential loss of principal. There is no guarantee that a particular investment strategy will be successful. Value investments are subject to the risk their intrinsic value may not be recognized by the broad market.

Foreign investing involves special risks such as currency fluctuations and political uncertainty.

Definitions: Beta: is a measure of the sensitivity of a portfolio's rates of return against those of the market. A beta less than 1 indicates volatility less than that of the market. Cyclical Stocks: cover Basic Materials, Capital Goods, Communications, Consumer Cyclical, Energy, Financial, Technology, and Transportation which tend to react to a variety of market conditions that can send them up or down and often relate to business cycles. Defensive Stocks: include Health Care, Utilities, and Consumer Staples. These companies usually don’t suffer as much in a market downturn as they relate to basic needs. Quantitative Easing: is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. TOPIX Index (also known as the Tokyo Stock Price Index): is a capitalization weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. The index is supplemented by the sub indices of the 33 industry sectors. The index calculation excludes temporary issues and preferred stocks, and has a base value of 100 as of January 4, 1968. TOPIX 500 Index: is a capitalization-weighted index designed to measure the performance of the 500 most liquid stocks with the largest market capitalization that are members of the TOPIX Index. The index was developed with a base value of 1000 as of April 1, 1998. All indices are unmanaged. It is not possible to invest directly in an index.

Robert C. Sharpe is a registered representative of ALPS Distributors, Inc.

The Heartland Funds are distributed by ALPS Distributors, Inc.

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