Morgan Stanley, JPMorgan See Japan Stocks as Cheap, Under-Owned

(Bloomberg) -- Japanese stocks look attractive right now as they’re both under-owned and unusually cheap, according to strategists from Morgan Stanley and JPMorgan Chase & Co.

Improvements in return on equity are bringing Japan’s equities in line with global peers, Morgan Stanley’s Andrew Sheets and colleagues said in a note Monday, while price-to-earnings ratios are still at appealingly low levels. They also see the yen, trading at about 108 to the dollar, as cheap. JPMorgan’s John Normand said in a report Friday that a skeptical backdrop has led Japanese stocks to be under-owned and at low valuations. This, coupled with healthy corporate balance sheets, means the shares are worth another look, they said.

“Japanese equities are trading significantly below what the yen is implying,” Normand wrote. “They are consistent with sub-100 JPY, which is in fact weakening of late. Japanese corporate balance sheets are net cash, buybacks are at highs, BoJ purchases continue and RoE of corporate Japan is holding at elevated levels, despite a cyclical growth downturn.”

Famed short-seller Michael Burry, who made his fortune betting against the 2008 sub-prime mortgage bubble, already endorsed the bet on Japan last month in an interview with Bloomberg. Burry spotlighted more than half a dozen undervalued small- and medium-sized Japanese companies as his picks against pervasive investor skepticism in a sluggish domestic economy, sending the stocks climbing.

That’s all in a market where the Nikkei 225 Index has risen 9.4% this year, compared with a 14% gain for the global MSCI ACWI. The price-to-earnings ratio of the former is around 15.5, while the worldwide gauge’s is 17.7.

Morgan Stanley, JPMorgan See Japan Stocks as Cheap, Under-Owned

Still, there’s room for caution. A cyclical market exposed to trade tensions, combined with the increase in the consumption tax that started this month, add to concern amid signs of weakness in the global economy and may create negative sentiment in the markets, the Morgan Stanley report noted.

But the strategists think that can be overcome.

“While Japanese equities are cyclical and exposed to a slowdown in global trade, our equity strategists believe that a forward P/E of 13.2x better discounts these risks than other markets, especially EM,” Sheets and colleagues wrote. “We also think that the market underappreciates the RoE improvement in Japan over the last five years, and a real shift toward greater dividend and buyback activity.”

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