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Capital Markets

Japan: In spite of its troubles, equities undervalued

Market seen as good value after protracted underperformance and earthquake; But care needed in finding recovery potential

Fund managers are urging investors to take another look at Japan’s battered stock markets after a combination of poor long-term performance and the March Tohoku earthquake have pushed valuations low across the board. Data from Chuo Mitsui Trust International, the London-based arm of the Japanese fund manager, reveal that 66% of listed Japanese companies were trading at a price to book (p/b) ratio of less than one as of April 1.

"The market has fully absorbed the implications of the damage suffered in the region and the direct consequences to firms that were particularly affected"

Chris Renwick, Chuo Mitsui Trust International

The p/b ratio of a company is a means of comparing its current book value (tangible assets minus liabilities) with the price of its shares. A ratio below one is low and implies that the company might be underpriced or in trouble.

While CMTI’s number is still below the record of 75% of companies reached in 2009 it is an increase on the situation before the global financial crisis: between 2005 and mid-2007 the ratio of companies trading at a p/b ratio below one was under 30%.

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