Last Updated: 2 June 2023
Matt, your comments have made me think long and hard about why I’m holding Japanese equities.
More on that in a moment, but in response to your question on gold volatility, no, it doesn’t really bother me, though I did get stopped out a couple of times last year trying to trade it. If you think of gold as a currency, then currency moves of 30% were more the rule than the exception last year.
EUR/USD traded between 1.59 and 1.23, USD/GBP between 2.02 and 1.46, and GBP/JPY between 220 and 132, for example.
I find the jewellery-related demand for bullion very hard to read, but I’m pretty confident that investment demand will continue to rise. We are in a debt crisis, and I think that governments around the world will pursue competitive devaluations, just as they did in the 1930s. There’s been a continuing flow of money into gold ETFs and ETCs, and understandably so, but nothing like the panic buying that one would expect to see at a blow-off top for bullion prices. There’s still a reasonable amount of scepticism about the prospects for precious metals, which should encourage bulls.
If you follow the long-term Dow/Gold chart, like a lot of people, then clearly we’ve already moved a long way from the 2000 peak of 43.7 to the current 7.5 (yesterday’s Dow close of 7182 divided by a gold price of 959). The ratio hit 1 in 1980, and 2 in 1932, the bottom of previous cycles, and I wouldn’t be surprised to see the ultimate equity bottom/gold top reach a similar figure. In the meantime, we could be due a bear market rally that takes the ratio back towards double figures, of course.
Returning to Japan, I’ve been lucky that the rise in the yen against sterling has somewhat cushioned the equity index fall (Topix is down around 15% in GBP terms over a year, compared to over 40% in yen). But I’d prefer not to rely on currency movements to bail me out.
Is the Japan Topix ETF still worth holding? I think it is, for a few reasons.
First, Japan is exiting a long deflationary downturn, while much of the rest of the world is entering one. Japanese commercial and residential property prices have started to pick up after a 15-year decline, even if deflationary expectations remain quite entrenched and will take a while to wear off.
After years when Japanese stocks had no dividends, they are on the rise, and payout ratios remain quite low by comparison with Europe and the US, suggesting that there is plenty of scope for further increases. Toyota, the largest stock in the Topix, has a yield of nearly 5% now. And if you compare earnings yields (the inverse of the P/E ratio) to government bond yields, then Japan has the highest ratio of the major markets.
Finally, the Topix trades at an overall discount to book value (0.85 times), so you can buy the market for less than its balance sheet worth. With generally more conservative accounting standards as well, and Japanese banks having largely avoided the credit debacle and leveraged structured products, the scope for unpleasant debt-related surprises in Japan is much lower than in the Western financial markets.
Finally, I started in the markets when everyone loved Japan, at the peak of the 1980s bubble, and now it’s almost universally written off. And while China and India may well be the places for future growth in Asia, these are still emerging markets, with all the associated risks.
The recent dive in the equity averages in Japan to 26-year lows reflects the severity of the global downturn on the country’s exporters, which are undoubtedly suffering badly. But even if global conditions worsen further, you can buy into some world-leading companies – Toyota, NTT, Canon, Honda Motor, Nintendo, Sony, Mitsubishi Corp. – at bargain prices, with decent dividend support and reasonable balance sheet strength.
I think I’ll buy some more next week!