Nomura’s (NYSE: NMR) (TYO: 8604) monthly “Individual Investor Survey” was released yesterday. (Here’s my walk-through for May). Japanese investors are slightly more bullish, while they remain concerned about international affairs with a particular interest in forex developments, naturally. Their top sector focus (most appealing/unappealing) was unchanged: they like capital goods and autos, somewhat surprisingly in my opinion; bearish on transportation and utilities, unsurprisingly. Japanese investors seem to always have a place in their heart for higher yielding currencies, hence their fondness for the Australian dollar, though they also like the yen, which is interesting because 65% of respondents see a weaker yen on the horizon. So what investment do Japanese investors like most?
Japanese equities remain their most appealing investment, though down slightly from the May report. While up big in 2013 on the back of Abenomics, the Nikkei 225 is some 3,000 points off its 2006/07 highs. I’m still finding excellent bargain stocks that exhibit the desirable characteristics of sound balance sheets, profitability, and even some growth. Meantime, cash and deposits were seen as less desirable, which makes sense considering even more respondents, 61.6% (+6.2% m/m), see consumer prices rising one year out — though the highest response rate, of 41.6%, expect prices to rise by less than 2%.
My favorite part in most of the Nomura surveys are the “spot questions.” This month, Nomura asked investors about their stance on capital efficiency at Japanese companies and what impact this might have on their investment approach.
Q: Do you think that Japanese companies have become more aware of capital efficiency considering the recent increase in the value of authorized stock buyback programs in Japan?
A1: (25%) Awareness has grown, but will not last long.
A2: (23%) Awareness has not grown, but will do so in the future.
A3: (22%) Uncertain.
A4: (20.8%) Awareness has grown, and will do so more in the future.
This is not particularly helpful other than perhaps to show that nobody really knows what to think. Empirically, Japanese companies repurchase stock at a much lower frequency than their counterparts in the U.S. Therefore, historically speaking, there is some skepticism among investors. And that there has been an uptick of late suggests as answer two reflects, awareness might be expected to increase. I recall there being a lot of buybacks in 2006-07, which was a cyclical high and a then peak for many country indexes. Alas, Japanese companies are not immune to procyclicality.
I must note that investors in Japanese stocks do have more transparency when there are to be buybacks. Japanese companies, by law, publicly disclose their plans (which often have a one-month period of validity) and soon after expiration file confirmation of the number of shares repurchased among other details. Maybe over the summer I’ll find some time to share a case study with the SEC and propose they adopt similar rules. Finally, with stock options still being a mostly unused form of compensation in Japan, there’s no need to fear repurchases that hide beneficial arrangements.
Now, on to the second part of the spot question:
Q: If more Japanese companies adopt a stronger focus on capital efficiency, what impact will this have on your investment approach?
A1: (43%) No change in investment approach (no impact).
A2: (33.4%) More active approach to equity investment.
A little disappointing to see that such a high percentage say it wouldn’t change their approach, seemingly meaning it wouldn’t make them more bullish or interested more specifically in investing in such companies. Yet that said, what should we expect given that so many “investors” are short-term traders looking for quick action and hoping a perceived signal in a stock chart will pay off.
Another not insignificant camp of investors are those that seek out yutaiken or in-kind perks that companies grant their Japan-based shareholders (e.g. gift cards, samplers of company products, bags of rice, etc.), which on their own can be considered meaningful returns and when combined with dividends can overall be quite attractive. I would argue that these yutaiken either cease being granted since overseas investors without a Japanese address for receipt of the goods are ineligible, or overseas investors be paid a cash equivalent!
There’s of course a lot of detail that I’m skipping over from the survey so if you like, have a deeper look (link). I’ll end with a mention of the “most watched stocks.” No big changes among the top picks (Toyota and Softbank) or the overall group. Note the dropping off of McDonald’s Holdings Japan (TYO: 2702), which if its stock price were to drop by half still might not be very interesting. And the additions of Zensho Holdings (TYO: 7550), best known for its Sukiya beef bowl restaurant chain (stock is too pricey; leveraged co.) and Japan Communications (Jasdaq: 9424), a mobile virtual network operator (MVNO; like Boost Mobile and Virgin Mobile in the U.S.), which is up an impressive 7-fold year-to-date (Jasdaq often has some of the biggest movers in Japan) though it’s not a stock I’ve paid much attention to and given its valuation doesn’t seem like one I’d be comfortable with compared to stable and boring compounders.