Long- Term
Japan investors, including myself, have been waiting an eternity for this event
to happen. The hard money has been made and the “easy” is to come!
The so
called „Iron Coffin Lid“ has been lifted finally. And, much to my surprise, the domestic
and international investment community could not care less.
The degree of ignorance
resembles the one surrounding the advent of Abenomics in 2012/2013!
Basically,
the „Iron Coffin Lid“ is a resistance bandwidth in the Topix Index between 1700 and 1900 points
that had been formed after the Japan bubble popped in the early 1990’s. During
the past 30 Years the level has been briefly touched or pierced on several
occasions. It was always followed by swift reversals and brutal downtrends
often leading to lower lows in the Index. It left Investors and speculators in
Japanese equities badly bruised and/ or ruined.
The “Iron Coffin Lid” should be
seen as a main contributor to the narrative of Japan being a buck searching for
windshield and bets on the country’s revival a widow makers trade.
Being
exclusively focused on Japan with my investments for over a decade now, I was
taught by Market- San to never get surprised getting surprised investing in
Japan. I am convinced this break- out will once again vindicate the lesson by
Mr. Market hopefully learned, as it might again turn into a false dawn.
Nevertheless,
there are numerous technical and fundamental aspects surrounding the current
outbreak that warrant optimism:
- The
break- out has a longer duration than any before, basically building up for
more than 8 months - Break-
Out is more significant price wise - Break- Out has been totally ignored/ not
recognized by domestic and international investors - Last
touch/ break took place in 2017/2018 was getting wide recognition on the WWW
but failed. Although, failure was swift it was not as severe as former ones.
Painful (the author admits) but nor devastating! - Ever
since the last touch/ piercing, international Investors (Speculators) were significant
net sellers of Japanese stocks. - Japanese
retail investors, on the other end, have been net buyers. (Regarding their
sophistication a lot has to be wished for. Nevertheless, attitude and knowledge
has improved significantly. Investment horizon is lengthening and more weight
is given to fundamental factors over technical issues.) - Seasonality
is positive è Japanese
equities tend to perform strongly during autumn/ winter
Let us turn
our attention to fundamental aspects surrounding this break- out-:
- Governance
has significantly improved in corporate Japan è better profitability; significant
increase of profits distributed to shareholders, etc. But financial pundits
still focusing on the bad apples è Nissan/ Ghosn; quality control
issues, etc. - Shareholder
activism in Japan is picking up steam but financial community oblivious about it
è
Japan’s first successful hostile takeover by a hedge fund was basically not
covered by the national/ international financial media - Japan
cheapest developed equity market on several counts. But Investors still
underestimating the bargain è do not adjust for high cash balance and
limited/ non- existent financial leverage - Japanese
Yen severely undervalued on numerous counts è deflation was significantly underreported - Short/
mid- term upside pressure on reported Inflation limited è change on reporting method this
year that went unnoticed by investors - Reported
earnings understated è conservative nature of J-GAAP still not fully
understood/ appreciated by Investors - Japan
the only developed country without financial repression è Japan the only developed country
without negative real interest rate - Since
the start of Abenomics, corporate Japan has paid the increased shareholder
returns out of free cash- flow è No financial engineering è Many balance- sheets rock solid - Small/
Midcap sphere still under researched/ under followed è huge inefficiency/ mispricing still
to be found for stock market operators willing to do some digging/ thinking out
of the box
Conclusion
The abovementioned fundamental/ technical bright
lights surrounding the lifting of the “Iron Coffin Lid” are only an excerpt.
Many more exist which are underappreciated by Japan observers, like absence of
populism, pragmatic immigration policy, limited impact of COVID 19 on the economy,
tight labor market, etc.
If the break- out is for real remains to be
seen. Actually, I could not care less as it will certainly not affect my
approach to investing in Japan. Nevertheless, would a break- out change the (negative) narrative about investing in Japan.
The lifting of the “iron
coffin lid” would silence the ignorant market pundits propagating the demise of
Japan. It would render those commentators and their arguments were they belong
to: The Garbage
heap of history!
