Japan and Greece: the two comeback countries

Key points in this equity note:

• Japanese equities continue to print new all-time highs up 16.5% this year as investors buying into the low equity valuation and potentially benefits from the US and China geopolitical tensions.
  
  
• Japanese equities still have a lot of potential upside as they are valued at a 50% discount to US equities.
  
  
• Greek equities are rallying 7% on the country’s election result extending the equity market gains this year to 31% as the country is coming back from the abyss.

The rise of the Japanese equity market

Back in April we wrote the equity note Will the sun rise over Japanese equities? highlighting Warren Buffett’s renewed commitment to Japanese equities which Berkshire Hathaway dipped into during the early days of the pandemic. Berkshire Hathaway wanted exposure to commodities but through a specific group of Japanese physical commodity trading companies due to strong market position and very low equity valuations. The bet turned out to be correct by Berkshire Hathaway and Japanese equities are overall up 16.5% this year in local currency terms and around 10.7% in USD terms. Warren Buffett’s marketing campaign for Japanese equities has worked well putting attention to this equity market in way we have not seen since Abenomics was introduced in late 2012. Japanese equities have delivered 270% total return in JPY terms since Abenomics was introduced. The long-term total return chart also shows how Japanese equities are now pushing hard into new territory.

The continuous tit-for-tat tactics between the US and China, with the latest being China’s ban of some of Micron’s memory chips, are also adding tailwind to certain “winner countries” that will benefit from fragmented supply chains. Japan has a good chance of being part of this group of winner countries together countries such as Mexico, India, Vietnam, Thailand, Indonesia, and Malaysia.

As we highlighted in our equity note back in April the Japanese equity market has healed from its bubble back in the late 1980s and since 1995 the Japanese equity market has gone from offering a 2%-point lower dividend yield compared to US equities to now offering almost 1%-point more lifting the expected return for Japanese equities. Measured on 12-month forward EV/EBITDA Japanese equities are also almost 50% cheaper than US equities adding the further upside potential of valuation multiple expansion which historically has been the rocket fuel of equity returns.