Head of Equity Strategy
Summary: Japanese and Greek equities are part of this year's comeback story with these two equity markets up 16.5% and 31% respectively in local currency terms. Japanese equities are the talk of the town after strong endorsement from Warren Buffett highlighting the low equity valuations in Japanese equities. Greek equities are rallying 7% today as the market is excited about the re-election of the country's centre-right Prime Minister Kyriakos Mitsotakis.
Back in April we wrote the equity note Will the sun rise over Japanese equities? highlighting Warren Buffett’s renewed commitment to Japanese equities which Berkshire Hathaway dipped into during the early days of the pandemic. Berkshire Hathaway wanted exposure to commodities but through a specific group of Japanese physical commodity trading companies due to strong market position and very low equity valuations. The bet turned out to be correct by Berkshire Hathaway and Japanese equities are overall up 16.5% this year in local currency terms and around 10.7% in USD terms. Warren Buffett’s marketing campaign for Japanese equities has worked well putting attention to this equity market in way we have not seen since Abenomics was introduced in late 2012. Japanese equities have delivered 270% total return in JPY terms since Abenomics was introduced. The long-term total return chart also shows how Japanese equities are now pushing hard into new territory.
The continuous tit-for-tat tactics between the US and China, with the latest being China’s ban of some of Micron’s memory chips, are also adding tailwind to certain “winner countries” that will benefit from fragmented supply chains. Japan has a good chance of being part of this group of winner countries together countries such as Mexico, India, Vietnam, Thailand, Indonesia, and Malaysia.
As we highlighted in our equity note back in April the Japanese equity market has healed from its bubble back in the late 1980s and since 1995 the Japanese equity market has gone from offering a 2%-point lower dividend yield compared to US equities to now offering almost 1%-point more lifting the expected return for Japanese equities. Measured on 12-month forward EV/EBITDA Japanese equities are also almost 50% cheaper than US equities adding the further upside potential of valuation multiple expansion which historically has been the rocket fuel of equity returns.
If take a look at the industry groups that have led the gains in Japanese equities then those are Semiconductors (+46%), Consumer Services (+39%), Consumer Durables & Apparel (31%), Technology Hardware (27%), and Capital Goods (24%). If we go deeper into these industry groups then the single stocks that have had the most momentum are:
Greek equities are rallying 7% to highest levels since 2014 (measured on the price index and not total return) following the Greek election result with centre-right Prime Minister Kyriakos Mitsotakis winning big over the opposition reducing political risks for Greece that has been through many ups and downs the past 15 years. The Greek equity market is up 31% this year and in total return terms the index is approaching the final peak in January 2011 before the severe austerity measures were implemented to avoid Greece failing as a state inside the euro area. From the lows in May 2012 the Greek equity market has now returned 186% or 10% annualized which is beginning to reach a level where those investors that dared to invest in the country during its darkest hours in modern history are being rewarded accordingly.
The equity market is a true vote of confidence to the new political class that is delivering results for the economy although the unemployment rate is still at 10.9%. But the unemployment rate has come down from 28.1% in 2013 and the current unemployment rate is where Greece was back in 2004. The comeback for Greece has been painful for the people and hopefully Greece will extend its good momentum. While the labour market has improved the real GDP is still 20% below its peak in 2008 highlighting that Greece experienced a traumatic economic depression. Despite the hardship I have a vivid recollection of my last visit to Athens back in 2014 where I met joyful people despite the hard times. There was a sense of the future could only get better. On a final note, it is worth mentioning that the debt-to-GDP, although still high, is at 171% the lowest since Q3 2015. 2024: The wasted year
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
