One of the world’s best-performing stock markets this month is also one of the most maligned: Japan. The Nikkei 225 is up about 8 per cent in local-currency terms, beaten only by a rebounding Argentina.
That will come as some satisfaction to Michael Burry, one of the investors made famous by Michael Lewis’s The Big Short. His Scion Asset Management has laid another bet based on a conviction that prices (in this case Japanese stocks, rather than US mortgages) are out of line with reality.
Scion’s Japan portfolio includes manufacturers of everything from roller coasters (Sansei Technologies) to semiconductor production equipment (Tazmo) and fire bricks for electric furnaces (Yotai). There are many other firms out there who would love this sortie by a celebrity fund manager to be hugely significant. But is it?
In turning to Japan, Dr Burry faces one of the great investment enigmas of the last three decades. The Japanese stock market is awash with companies with lots of cash and hard assets but with many of them trading well below book value.
The trick in Japan has never been identifying “value” stocks, but in picking where there might conceivably be a catalyst for that value to be recognised. For many years, this felt pretty fruitless, but the scene appears to have improved. Activism, in its various forms, is having a visibly powerful effect on the behaviour and share prices of Japanese companies that have been targeted, and has not yet triggered the type of grand pushback that many had feared.
Behind the scenes, activist funds have chosen a less high-profile approach, judging correctly that their chances are better with Japanese management if exposure in the media is used as a threat, rather than deployed as an opening gambit.
In that context, Mr Burry’s move not only makes sense, but justifies the evolving theory for some that, under current global market conditions, “value” as an investment strategy is due a revival.
Value stocks have outperformed in September, and a broader revival in value was on the minds of managers as they descended on CLSA’s recent investment forum in Hong Kong. Indeed, reports the brokerage’s chief Japan strategist, Nicholas Smith, it was the number-one thing he was asked about at the event.
But Mr Smith is not convinced. Many of Japan’s value stocks are, he argues, dangerously exposed to further easing by the central bank and an imminent tax hike.
Take banks, which account for about two-thirds of the market capitalisation of stocks trading below half their book value. Their performance has been bludgeoned by negative interest rates but many are suffering from lack of demand in the country’s depopulating regions.
There is no clear pattern, argues Mr Smith, as to when in the cycle “value” stocks outperform, but there is evidence that it does very badly in times of low growth, low inflation and low yield. Precisely the conditions we have today.