In the early 90s, Al Chan, a global value manager at Brandes Investment Partners, could find little in Japan to buy. Today it’s almost twenty percent of his fund – watch him make the case for value in Japan.
Japan, the last 20 years:
Japanese stocks are off 70% for the period - What led to that 20 year of underperformance?
- the banks had their crisis, and they delayed dealing with the bad loans, and that situation has improved now.
- and then you come forward to today, and we like to say Japan is getting a "D"-grade.
- the market is talking about deflation, the democratic party of Japan, debt, the demographics of Japan - all are very poor.
Those are the obstacles, What is attractive about Japan?
- Japan is the #2 economy after the U.S.
- Japan is the #4 exporter in the world, and exports are growing. Last year they grew by 12%.
- Japan's GDP is rising, and the strong yen is beginning to weaken.
and what about (corporate) earnings...
- as the economy is turning around, the earnings prospects are turning around as well.
- we're starting to see that at some of the companies that we've invested in.
- Japan is trading at 30-year lows, and now their trading right about book value, and we think its the cheapest developed market in the world.
- today stocks are trading at roughly one times book value, and if you wind the clock back ten years, they were trading then for 2.5x book value. (dan: so you're about 40% of the valuation based on that metric relative to ten years ago)
One company that epitomizes what Chan likes in Japan:
Sumitomo Mitsui Financial - it is a bank that has a very strong deposit base, capital ratios have improved very dramatically, and non-performing loans are not as bad as the situation in the US and Europe.
Dan: with interest rates at zero percent for so long, what does the prospect of rising interest rates mean for a bank like Sumitomo?
Well, you can imagine that as a bank, you can't make money when interest rates are zero, so if we get a half percent rise in interest rates that will make life much easier.
