Worried About U.S. Stocks? Explore Potential Opportunities in Japan
As concerns over the concentration and performance of the S&P 500 rise, U.S. investors are being urged to diversify their portfolios. Shuntaro Takeuchi, a portfolio manager at Matthews Asia, points towards Japanese companies as viable options for investors looking to mitigate risks associated with the American stock market.
Understanding the Current Landscape
The S&P 500 has consistently performed well, benefiting those who have maintained a long-term commitment to index-tracking funds. However, warnings regarding its over-concentration in a small number of stocks raise red flags for risk management. Takeuchi highlights the challenges faced by developed markets, stating, “The world, especially the developed market and China, is starting to look like Japan.” This sentiment underscores the demographic issues that are beginning to emerge in various economies.
According to Takeuchi, Japan has already implemented changes to address these demographic challenges, positioning its companies to better weather the evolving landscape that other countries are just beginning to face. As a result, he recommends that U.S. investors look beyond their borders and consider adding Japanese equities to their portfolios.
A Comparison of Performance
A comparative analysis of Japan’s Nikkei 225 Index with the U.S. S&P 500 illustrates intriguing insights. The total returns on investment for both indexes, along with their price-to-earnings (P/E) ratios, provide valuable data for investors looking to make informed decisions.
| Index | 10-Year Return | Forward P/E | Forward P/E 10 Years Ago | 10-Year Average P/E | Current Forward P/E to 10-Year Average |
|---|---|---|---|---|---|
| Japan Nikkei 225 | 160% | 17.7 | 17.8 | 17.3 | 103% |
| S&P 500 | 251% | 22.4 | 17.0 | 18.6 | 121% |
While the S&P 500 boasts a greater total return over the past decade, it comes at a higher current P/E valuation compared to that of the Nikkei 225, which remains consistent with its long-term average. This discrepancy suggests that investors may find relative value in Japanese equities.
The Japanese Corporate Advantage
Takeuchi illustrated that despite Japan’s muted GDP growth, corporate earnings have demonstrated robustness, with an estimated compound annual growth rate (CAGR) for the Nikkei 225’s earnings per share (EPS) at 8.0%, surpassing that of the S&P 500 at 7.4%. He attributes this resilience to improved capital allocation practices among Japanese companies, suggesting that many are now operating with greater efficiency amidst a previous overcapitalization.
Notably, around 40% of publicly traded Japanese firms are classified as “net cash,” indicating that their cash reserves exceed their interest-bearing debt. This presents investors with opportunities as these companies are expected to judiciously allocate their excess cash towards initiatives like research, dividends, and stock buybacks which can improve earnings per share.
Highlighted Japanese Companies
Takeuchi mentions several Japanese companies that exemplify this trend:
1. Hitachi Ltd. (JP:6501)
With a focus on streamlining operations, Hitachi has narrowed its business down to three core areas over the past decade and has engaged in aggressive stock buybacks, ultimately delivering a 478% return on its stock in the past five years.
2. Sony Group Corp. (JP:6758)
Sony has also successfully simplified its operations, concentrating on three main content platforms—music, pictures, and gaming—while additionally leveraging its manufacturing abilities in the tech sector. Despite a 0.53% dividend yield, Takeuchi sees potential for improved capital efficiency that may enhance future cash flow.
3. Toyota Motor Corp. (JP:7203)
Despite skepticism surrounding its transition to electric vehicles (EVs), Toyota’s multi-pathway approach positions it to meet diverse consumer preferences. Takeuchi indicates that Toyota is improving its cash flow, suggesting a bright outlook for future growth.
Conclusion
With the ongoing risks associated with the U.S. stock market and the undeniable growth potentials in Japan, diversifying your investment portfolio to include Japanese equities may provide a strategic advantage. The corporate improvements and capital allocation efficiencies being realized by Japanese firms make them compelling candidates for U.S. investors looking to reduce risk and seek substantial growth opportunities in a shifting global landscape.