Latest data from asset manager NN Investment Partners shows that the risk premium on Japanese stocks has hit a record 8.8%.
The equity risk premium is how much extra investors should expect to get back from buying shares over the risk-free rate. In other words, if you put £1,000 into the FTSE 100, how much more would you likely get back after a year versus sticking your cash in the bank, or from government bonds?
UK 10-year gilts are currently offering 1.12%, according to MarketWatch data, whereas savers can get about 1.4% from some of the better easy access UK savings accounts (says MoneySuperMarket).
Using NN’s 8.8% risk premium calculation, investors should get 8.8% a year above this by buying Japanese stocks included in the Nikkei 225 index, Japan’s benchmark index (equivalent to the FTSE 100).
JAPAN’S HOUSEHOLD NAMES
This might include consumer companies like brewer Asahi, Japan Tobacco, FujiFilm, electronics giants such as Sony or Panasonic, or car makers like Honda, Nissan and Suzuki.
‘Our top-down signals for Japan, which are based on both macro fundamentals and behavioral dynamics, are improving and equity valuations are attractive,’ says Patrick Moonen, principal strategist of multi-asset at NN Investment Partners.
NN’s research calculates the forward price to earnings (PE) ratio for Japanese equities at around 11-times, also indicating ‘deep value’, the researchers say.
‘These valuations do not capture the structural improvements Japanese companies have made in their profitability, measured by the return on equity,’ adds NN’s Moonen.
Return on equity is how much profit a company generates for every £1 invested in its shares by investors.
GLOBAL LAGGARD
Japan’s Nikkei 225 has been among the worst performing of the world’s major stock markets in recent years, running the dismal returns of the UK’s FTSE 100 very close.
Moonen does flag potential pitfalls going forward, however. ‘Given the importance of the export sector, the biggest risk lies in a rapid appreciation of the Japanese yen relative to the US dollar,’ the strategist says.
‘However, unless this appreciation is a consequence of a rise in risk aversion, this should be manageable for the Japanese equity market.’
