100 Club: JOHCM duo benefits from ‘cheap’ Japan

100 Club: JOHCM duo benefits from ‘cheap’ Japan

Global equity managers Christopher Lees and Nudgem Richyal have targeted Japan and emerging Asia as the only two geographic overweights in their JOHCM Global Select fund.

The pair had 12 per cent exposure to Japan at the end of May, which is 4 percentage points more than their MSCI AC World index benchmark, and 16.3 per cent in emerging Asia – nearly double the index’s 7.4 per cent.

Mr Lees said in a client update that Japan was now “one of the cheapest developed markets in the world”.

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The JO Hambro Capital Management manager said the stockmarket in the country traded on a price-to-earnings (p/e) ratio of 15 times and a book value of 1.4 times.

A ratio below 1 suggests the company is valued by the market to be worth less than the value of its assets.

He also said the Japanese market had a return on equity (ROE) of 9 per cent.

The ROE is the amount of net income returned as a percentage of shareholders’ equity, so in effect an expression of the type of returns investors can expect.

The manager added emerging Asia traded on a 13 times p/e ratio and a 1.5 times book value, with an expected ROE of 15 per cent.

“Both compare very favourably therefore with Europe’s 17 times p/e and 1.8 times book value for 9 per cent ROE, or the US’s 18 times p/e and 2.7 times book value for 15 per cent ROE,” Mr Lees said.

“Perhaps more importantly, Japan has finally embarked upon significant western-style corporate restructuring, which is driving some of the fastest-growing earnings revisions and ROEs in the world.

“The catalyst seems to have been the new JPX-Nikkei 400 ROE index and the embarrassment felt by corporate leaders whose companies did not make the index.”

The index was formed as part of prime minister Shinzo Abe’s economic reforms and aimed to encourage businesses to act in what is deemed a more shareholder-friendly way.

This includes considering dividends as a prominent business strategy and returning cash to shareholders when no other use can be found for it, something common in western markets.

Elsewhere, the managers have benefited recently from strong outperformance by their stock selection in the technology and healthcare sectors.

“Several of our holdings also reported positive earnings or acquisitions and rose more than 10 per cent during May: Avago, Quorvo and NXP in the technology sector; and Mallinckrodt, Gilead and Valeant in the healthcare sector,” Mr Lees said.

He added that technology was the “only sector with three green lights in our top-down monthly scorecard”, which assesses fundamentals, valuation and trend.

The manager said healthcare was seeing “accelerating growth in a decelerating world”, and that it and the technology sector were “enjoying a new merger and acquisitions boom”, so still made up the majority of the portfolio.

“Consumer stocks are benefiting from the [low] oil price, but bond proxies, such as utilities and telecommunications, are underperforming as bond yields finally rise,” Mr Lees said.