Jap smaller co's - the cheapest assets in the world

Brian Dennehy

Japan is a basket case to be avoided.  Or so we have been told.  Yet such pariah status often hides deep value and fantastic opportunities for investors that take a long view and can commit to monthly savings. The signs are that more long term investors are reaching the same positive conclusion that we did some time ago.

In July 2007 there was a clear opportunity in Japan, particularly in cash-rich domestically-focussed smaller companies.  Many smaller companies were on single digit price earnings (PE) ratios and their stock market values were some way less than their asset (or break-up) values.

Of course such deep value is there for a reason.  The Japanese economy has been mired in deflation for nearly two decades, and theit stock market has been in a bear market over the same period.  It peaked in 1989 at 39,000, and the stockmarket hit a low of 7,700 in 2003, from which it bounced strongly to over 18,000 in 2007, only to plumb new depths earlier this year, as financial Armageddon on a global-scale was feared, and hit 7,000.

Very uncomfortable if you had invested lump sums, but ideal for building an exposure through monthly contributions.

We were particularly encouraged in March 2009 when renowned analyst James Montier proclaimed "Japanese smaller companies are just about the cheapest in the world".  He scours the world for bargains using the hugely conservative valuation measure developed by Graham and Dodd (Google them if you are interested in more detail).  He wasn't looking for whole stock markets or even sectors, but rather individual companies that displayed the characteristics of deep value.  Half of all such opportunities in the world were found in Japan, particularly smaller companies.  And remember that he did this scan after stock markets had plummetted world wide, so it was unusual that any one sector should dominate.

We were even more encouraged over the last month when we spotted on the front page of our own web site (see "Top Performing funds") that Japanese funds, particularly those focussed on smaller companies, dominate the performance tables.  For those prepared to take a long view, keep accumulating.  If this recent rally stalls, if Japan and the world economy tumble again, you don't care.  You will buy even more, even more cheaply, at somewhat less than its asset value, and this will eventually be recognised by the market - just be patient.  And if it feels a bit uncomfortable, jolly good - that's exactly how you should feel ahead of making your most profitable investments, ahead of the crowd.

Either the M&G or Axa Framlington Japanese Smaller Company funds fit the bill.

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