By Patrick Rial and Michael Tsang
June 1 (Bloomberg) -- The steepest rally in the Topix index in 56 years has turned Japanese stocks into the world’s most expensive equities. Not for long, say hedge-fund managers betting the recession will prevent earnings from rebounding.
Bridgewater Associates Inc., Highbridge Capital Management LLC and Farallon Capital Management LLC, which together oversee almost $80 billion, increased bets against Japanese companies in the past three months, filings to the Tokyo Stock Exchange show. The Topix climbed 28 percent in the same period, the most since 1953, and shares in the index trade at an average 41 times estimated earnings, the highest level among the 40 largest markets, data compiled by Bloomberg show.
Bullish investors say Japanese stocks, which have recovered 41 percent of the losses that followed the collapse of New York- based Lehman Brothers Holdings Inc. in September, will rise further because analysts predict earnings will rebound the most since 2000. Bears point to forecasts by economists that show Japan will contract twice as much as the U.S. this year.
“Investors are anticipating a strong earnings recovery in 2010, but it’s really doubtful,” said Kazuyuki Terao, a Tokyo- based manager at the Japanese unit of Allianz SE, which oversees $1.6 trillion. “The markets have gotten ahead of themselves.”
The Topix rose 2.5 percent to 897.91 last week, while the Nikkei 225 Stock Average advanced 3.2 percent to 9,522.50. Both measures gained for a third consecutive month.
Higher Valuations
Japanese valuations dwarf those of companies in the Standard & Poor’s 500 Index, which trade at an average 16.1 times earnings, based on 2009 estimates. Stocks in the Topix are also more than twice as expensive as shares in China, Hong Kong, Australia and South Korea, and trade at about three times the valuations for Germany’s DAX Index, the U.K.’s FTSE 100 and France’s CAC 40, data compiled by Bloomberg show.
A decline to the average valuation during the past five years of 21.18 times earnings would drive down the Topix by 48 percent, according to data compiled by Bloomberg.
The 1,703 companies in the Tokyo Stock Exchange’s first section, where the biggest Japanese corporations list, are forecast to earn an adjusted 21.89 yen (23 U.S. cents) per share this year, based on share-weighted analysts’ estimates compiled by Bloomberg. In 2008, they lost 12.99 yen a share.
Japan’s economy shrank at a 15.2 percent annual rate in the first quarter, the most since data began in 1955. Gross domestic product will drop 6.7 percent in 2009, according to the median forecast of 11 economists compiled by Bloomberg. That’s more than twice the 2.8 percent contraction projected for the U.S. in another survey of 61 economists.
Lost Decade
The Topix slumped 42 percent last year, the steepest decline since 1950, as losses and writedowns at the world’s biggest financial companies climbed toward $1.48 trillion and spurred the first global recession since World War II. The index would have to more than double to return to the 15-year high reached on Feb. 26, 2007, and climb 221 percent to match the record reached in December 1989, before the so-called bubble economy popped, triggering what’s now known as Japan’s lost decade of the 1990s.
“There’s a limit to how far the market can fly unless there’s confirmation on the economy,” said Hiromichi Tsuyukubo, a hedge-fund manager at Myojo Asset Management Japan Co., which oversees $110 million in Tokyo and has been adding to short positions since March. “We’re nearing the crest of the wave.”
In short sales, speculators sell borrowed stock, wagering they will be able to buy it back later at a lower price and keep the difference.
Casio Computer
Bridgewater, the largest U.S. hedge-fund manager, with $38.6 billion in assets, increased bets against Japanese stocks in May, according to Tokyo exchange data compiled by Bloomberg.
Ray Dalio’s firm, located in Westport, Connecticut, boosted its short stake in Casio Computer Co. by 20 percent to 896,000 shares last month, based on a May 26 filing to the Tokyo exchange. The Tokyo-based maker of Exilim digital cameras and G- Shock watches, which lost 83.62 yen per share last fiscal year, rose 53 percent in 2009 on speculation profits will rebound.
The advance has pushed Casio’s stock to 856 yen, or 47.82 times its estimated full-year profit of 17.9 yen per share, according to Toyo Keizai Inc., a Tokyo-based research firm. That’s more expensive than at any time since at least 2001, data compiled by Bloomberg show.
Swatch Group AG, the world’s biggest watchmaker, is valued at 14.72 times estimated 2009 earnings, or less than a third what Casio fetches. The company is based in Biel, Switzerland.
Bridgewater spokesman Alexei Nabarro didn’t respond to telephone and e-mail messages seeking comment.
Shorting Mizuho
Highbridge, the New York-based firm that oversees $20 billion, more than tripled its short position in Mizuho Financial Group Inc. to 100.5 million shares in May, according to exchange filings compiled by Bloomberg.
Mizuho, Japan’s second-largest bank by assets, has climbed 37 percent since falling to a 5 1/2-year low in March. The Tokyo-based company said on May 15 it will issue as much as 600 billion yen in new common stock after posting its first loss in six years. The rally lifted its price-earnings ratio to 16.53, consensus analysts’ estimates compiled by Bloomberg show.
That’s 74 percent higher than the valuation on Bank of America Corp., the largest U.S. bank by assets. Shares of the Charlotte, North Carolina-based company trade at 9.5 times estimated earnings for 2010, data compiled by Bloomberg show.
Lisa Steele, a spokeswoman for Highbridge, didn’t respond to telephone and e-mail messages seeking comment.
Sumitomo Realty
Farallon started a $25 million bet in March that Sumitomo Realty & Development Co. would decline, according to a filing to the Tokyo exchange compiled by Bloomberg. Six of the 15 analysts tracked by Bloomberg recommend selling the stock, which has soared 80 percent from its low for the year in March.
Patrick Clifford, a spokesman for San Francisco-based Farallon, said the firm’s policy is not to comment on its holdings. The firm oversees $20 billion, making it the 10th largest hedge-fund manager, according to Alpha magazine.
By some measures, Japanese stocks are a bargain. Companies in the Topix trade at 1.15 times book value, or their assets minus liabilities, the cheapest in Asia after South Korea, according to data compiled by Bloomberg.
‘Significant Discount’
The index’s price is 0.24 times the combined sales of its companies. Among developed markets, only Iceland is less expensive by that measure, data compiled by Bloomberg show.
Japan proposed an unprecedented 25 trillion yen in stimulus spending to revive growth, equal to 5 percent of the economy. The policies include tax incentives for home purchases, spending on health care and discounts on fuel-efficient automobiles.
“Japan is still trading at a significant discount to other markets,” said Jeremy Hall, the Singapore-based director of Japanese equities at Henderson Global Investors Ltd., which oversees about $72 billion. “Price-earnings ratios are not a sensible way to look at valuations this year because you are going to get recession earnings.”
China’s $585 billion stimulus package may help Japanese manufacturers. In the last decade, exports to the world’s most populous nation have surged to 16 percent of total shipments from 5.2 percent, while the share for the U.S. dropped by almost half, data compiled by Bloomberg show.
Failed Stimulus
A rebound in exports helped spur a 5.2 percent rise in Japan’s industrial production in April, the biggest jump in 56 years, data from the Trade Ministry showed last week.
Tokyo-based Nissan Motor Co., Japan’s third-largest automaker, said last week that car sales in China rose 37 percent in April, the only region where the company’s sales increased. Osaka-based Sharp Corp., Japan’s biggest maker of liquid-crystal displays, said it expects to sell 2 million mobile phones in China in the year ending March 2010.
Oversees sales rose before Japanese stocks rallied in the past. Exports increased for 11 straight months before the Topix started an advance in March 2003 that more than doubled the value of equities over the next four years. The 62 percent rally in the Nikkei average that began in October 1998 was preceded by four months of higher international sales.
During the 1990s, Japan spent 135 trillion yen on 10 economic stimulus plans, none of which worked, said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. This year’s measures are more encouraging because they focus on essential infrastructure, not propping up companies that should be allowed to fail, he said.
Political Leadership
Japan’s Liberal Democratic Party, which has ruled the nation for all but 10 months since 1955, may lose power in an election that must be called before October, jeopardizing the government’s spending measures. The Democratic Party of Japan’s leader, Yukio Hatoyama, beat Prime Minister Taro Aso in at least five opinion surveys conducted last month.
Hatoyama, whose grandfather founded the ruling party, was chosen by DPJ lawmakers last month to replace Ichiro Ozawa, who was forced to quit due to a campaign funding scandal.
The economy contracted last quarter as exports fell 26 percent, the biggest decrease ever. Shipments abroad have dropped for seven straight months as demand from Europe and the U.S. shrank, according to data compiled by Bloomberg.
“Of all of the opportunities around the world, Japan, in my mind, ranks at the bottom,” said Fritz Meyer, the Denver- based senior market strategist for Invesco Aim, which oversees $348 billion. “If you look at the fundamental drivers of economic growth, Japan just doesn’t have them.”
To contact the reporters for this story: Patrick Rial in Tokyo at prial@bloomberg.net; Michael Tsang in New York at mtsang1@bloomberg.net
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