STOCK TAKE:TURNING JAPANESE: Buy when there's blood in the streets? Japan bulls certainly seem to think so.
“A buying opportunity,” said Warren Buffett. “Undervalued,” said Société Générale’s Dylan Grice, who believes people should be “buying with both hands” in the event of further heavy falls, a sentiment echoed by Gluskin Sheff’s David Rosenberg.
Rosenberg and Grice are seen as “perma-bears”, so why the excitement? Valuation, for one. Yes, Japanese gross domestic product and earnings will be hit, but global markets are priced at twice book value, double what it is in Japan, Rosenberg notes. Long-term valuation metrics suggest the Nikkei is cheaper than at any time over the last 40 years.
Second, the recent panic is evidenced by Japanese market volatility nearly hitting levels seen in the wake of Lehman’s bankruptcy, reflecting a “sell first, think later” approach.
Third, Japanese equities are “massively under-owned” by foreign investors, Grice argues.
Investors belatedly concurred and the Nikkei reclaimed half of its losses within days. Obvious risks (currency movements, economic turmoil, debt levels) remain. Still, recent falls may be “a good opportunity to reduce exposure to other equity markets, and increase Japan”, says Hong Kong research outfit Gavekal.
CASH ONLY: In contrast, British analyst James Montier is “deeply, deeply worried” by the “government sponsored market mania” in the US, where markets are nearly “priced for perfection”.
Metrics suggest the SP 500 is 40 per cent overvalued compared to its historical average, Montier says. Near-term, it may go much higher still, but Montier sees poor long-term returns as a given.
Startlingly, the GMO analyst says just 10 stocks in Europe pass the “margin of safety” standards employed by value investing legend Ben Graham, who mentored Buffett. In the US, not one stock in the SP 500 passed.
In short, go to cash. “Cash has a dry-powder value that people underestimate,” he says.
HERD EFFECT: Market corrections and crashes are notoriously difficult to time, but a study tells investors to look out for “co-movement” of stocks.
Shortly before the 2008 crash, stocks were moving in unison. On up days, the vast majority rose; on down days, the vast majority fell. Looking back to 1985, this co-movement always increased in the periods leading up to a crash.
Prof Yaneer Bar-Yam, co-author of the study, is a systems scientist and econophysics expert. However, while markets are prone to such herding behaviour, it seems premature to extrapolate future co-movement might indicate a near-term crash, given the swing from actively managed funds into exchange traded funds, which track the movement of indices, so it’s likely stocks will increasingly tend to rise and fall in unison.
