WisdomTree Minds on the Markets
WisdomTree
Minds on the Markets
WisdomTree
Minds on the Markets
The Tokyo Stock Exchange Is Dead Serious on Cost of Capital “Consciousness”
ARCHIVE: Week of February 5, 2024
The Tokyo Stock Exchange’s memos to Corporate Japan always come off as bland, buttoned up, yawn-inducing. We have been slogging through them because the Tokyo Stock Exchange (TSE) is not mincing words anymore.
The latest memo, released February 1, is called, “Considering the Investor’s Point of View in Regard to Management Conscious of Cost of Capital and Stock Price.” It sounds like a chapter of a boring textbook. Nevertheless, here is its message:
“We’re serious this time.”
Serious about changing the count of companies that are trading for less than book value. Serious about the management teams of Corporate Japan actively communicating with activist stockholders. Serious about strengthening shareholder returns. Serious about publicly shaming companies that haven’t fallen in line.
The country is having a moment of truth because of the perception that all the fun is taking place on the NASDAQ and NYSE. What is essentially happening is the TSE appears to be as serious as a heart attack; it has taken to publishing periodic guidance pieces where it asks for all listed companies to get their houses in order if they have a balance sheet that is stocking up on 0%-yielding JPY cash or if management has a habit of destroying shareholder value. In Japan, these issues are ubiquitous.
Focus on the phraseology: “…management conscious of cost of capital and stock price.” Those are the specific words that the TSE uses repeatedly in these memos. Consider it the motto. The word “conscious” comes up 17 times in last week’s 25-page PowerPoint deck. “Cost of capital” appears 74 times, or about three times per slide.
The now-published “name-and-shame” list lays out all firms who called the TSE’s bluff by refusing to report on their plan to clean up their act. Now the TSE seems to be creating a “name-and-congratulate” list too; the document gives kudos to a few dozen companies that took explicit action to buy back stock, issue dividends or boost profitability.
We also have some clarity from the TSE on specific profitability numbers too. Whereas, the original warning papers from last year were hyper-focused on firms trading below book value, we count five appearances of an 8% return on equity target. Firms that clock in below that figure will be shamed. Nevertheless, the better-managed firms are not out of the woods:
“It is not enough to merely check whether the current P/B ratio is above 1 or ROE is above 8% for a convincing analysis and evaluation from an investor’s perspective.”
In other words, the TSE is moving the goalposts on the better-run firms too.
Nevertheless, because large caps get more analyst coverage, a smaller proportion of them trade at depressed valuations than do small caps. The bulk of the proverbial cigar butt investments lurk inside lower market-cap baskets. Though we think the TSE’s actions will lift all boats, logic points to more upside in Japan’s small-cap value stocks, a group that has been notorious for shareholder value destruction. Hundreds of C-suite teams will find themselves using 2024 trying to figure out how to prove to the TSE that they are “management that is conscious of cost of capital and stock price(s).”
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