WisdomTree Minds on the Markets
Minds on the Markets
Minds on the Markets
Archive: June 26, 2023
Japan’s Catalyst: The TSE’s Price-to-Book Threat
What a peculiar situation being presented in the stock market this summer: investors so gaga over artificial intelligence that a scant few can explain why the Japanese stock market is ripping higher.
There are many explanations for the MSCI Japan Index’s 17% year-to-date run, which bests the 16% currently posted by the AI-heavy S&P 500, but nothing does it quite like the Tokyo Stock Exchange’s delisting threat. The refrain: if a laundry list of corporations do not get their valuations up, their names will be on the list.
The TSE even put numbers behind it. A price-to-book ratio south of 1.0 puts a company on the radar. For some context, MSCI Japan as a collective was only valued at 1.36 times book at month-end, or about a third of the S&P 500’s valuation of 4.16.
We aren’t talking about a handful of bad apples. In April, Nikkei Asia wrote that a ratio under 1 “is a signal that investors do not see enough potential for growth” in a stock and that “around 1,800 companies…or more than half, fell short of the [price-to-book] P/B ratio threshold.”
Much of what is keeping so many of these companies’ valuations subdued is idle cash building up on balance sheets. For example, we found that only 10% of Japanese stocks have current liabilities exceeding current assets. In contrast, the figure for the S&P 500 is 29%. When global stock markets were melting higher from 2009–2021, all that cash yielding 0% was a huge drag when there were acquisitions to be made and big projects to be undertaken. In many minds, it still is.
Because of Japanese corporations’ cash mountains, the push from on high is to boost dividends and/or buybacks. Should a critical mass of companies follow through in doing that—and should the TSE’s threat hold water—it would be music to WisdomTree’s ears, owing to a sizeable chunk of our asset base being in dedicated Japan funds.
There is some game theory to respect in all of this. Remember the old saw that if you owe the bank $100, that’s your problem, but if you owe the bank $1,000,000, that’s the bank’s problem?
If low valuations were an issue for a few dozen or even a few hundred companies, there would be some definite urgency in boardrooms; no one wants to be the rotten egg that gets delisted. But if half the companies in a major stock market have low valuations, can the TSE really delist so many of them? You can’t bench the bulk of your roster, then stick three players out on a basketball court.
The risk for Japan longs is that 2024, 2025 or even 2026 roll around, and the cash is still sitting there, earning nothing, with scant delistings—an empty threat. But the reward comes if officialdom is serious. Pay special attention to firm-specific dividend and buyback announcements, with an eye to stocks’ reactions thereafter. If companies that get the proverbial memo see their stocks pop after playing the buyback card, that will be the guidepost for gauging whether this price-to-book threat is the real deal.
For more information, contact your WisdomTree representative or visit WisdomTree.com/investments.
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