Investors are ignoring undervalued stocks in Japan that are backed by strong fundamentals, fund annual meeting is told

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Written by Ray Clancy

Monday, 06 December 2010 15:06

Japanese stocks are at their most undervalued in years and low investor confidence masks strong company fundamentals, according to Ed Merner, Fund Adviser to the Atlantis Japan Growth Fund.

Speaking at the Annual General Meeting of the Atlantis Japan Growth Fund, Merner said that he believes that the strong Yen, whilst restraining current corporate earnings and economic growth, is actually forcing Japanese companies to become even more efficient in order to compete.

‘Rarely in my 30 years investing in the Japanese markets have I seen stocks so undervalued and such strong fundamentals ignored by investors. Estimated price-to-earnings (P/E) ratios are at their lowest in years and 80% of companies on the main stock exchange are trading below their book value. Furthermore, whilst an average dividend yield of around 2% may look small compared to some other markets, deflation in Japan means real yields are actually very high,’ he said.

‘I have been visiting companies that are streamlining their business functions and staff levels to help maintain profit margins as much as possible. This has made them incredibly efficient so even a small depreciation in the Yen will make them very competitive internationally and directly boost their bottom line,’ he explained.

Merner highlighted that Japan’s spending on research and development (R&D) outstrips Korea, US, Germany, France, UK and China and is still continuing to rise. ‘Investing in R&D doesn’t guarantee you success but when you have as many global leading companies as Japan does in sectors such as manufacturing technology, electronics and automobiles, it certainly gives you confidence in the future,’ he added.

He pointed out that there are clearly possible risks for investors in Japan, just as there are in every other market. ‘It’s quite possible that we’ll get worse than expected GDP growth for the year ending March 2012 and this could impact corporate earnings estimates. Also, with the economy so dependent on exports, any weakening in the global economy or strengthening of the Yen will have a negative impact,’ he commented.

It is, however, continued investor apprehension which provides the greatest short term risk as continued selling by both domestic and overseas investors will continue to subdue stock prices. This also provides the long term opportunity though according to Merner.

‘Buy when the media is negative or just not interested, buy when stocks look cheap in terms of book values and real dividend yields, buy when institutional investors are mostly selling and when other investors are uncertain. Whatever you do, don’t get caught up in short term investment fads or fashions to the extent that you are ignoring market fundamentals,’ he told investors.