Views From the Floor - The End of Abenomics?

Japanese equities and the end of the Abenomics boost; what does normal look like for Low Volatility stocks; and have Value stocks re-rated after an impressive year?

The End of Abenomics?

Almost ten years ago, Prime Minister Shinzo Abe delivered his ‘Three Arrows’ prescription for a stagnant Japanese economy: expansionary monetary policy, fiscal stimulus, and structural reform. Overseas investors purchased some JPY25 trillion by the end of 2015 (Figure 1), signalling widespread approval for Abe’s economic vision.

A decade later, the passion for Abenomics has long since passed. Although foreign investment is marginally positive on a net basis, the majority of overseas money had left the Japanese stock market by 2020. A decade of expansionary monetary policy has also resulted in a historically cheap yen, which is at its lowest levels on a trade weighted basis since the collapse of the Bretton Woods Agreement some fifty years ago (Figure 2). By financial measures at least then, the Abenomics boom is over.

However, from perspective of a Value investor, the situation is actually rather attractive. The Topix is currently trading at a price-to-earnings ratio of 13.2, lower than comparable developed market indices such as the S&P 500 (18.4), FTSE 100 (16.1) but above the Euro Stoxx 50 (12.9). Overseas capital tends to have an outsized effect in moving Japanese equity prices, as domestic asset owners have a marked tendency towards buy and hold. Thus overseas investors own roughly a third of Japanese equities but are responsible for around two thirds of total trading. With the yen cheap, Japanese equities cheap on a price-to-earnings multiple basis, and overseas ownership low, any return of foreign buying activity would likely have a large impact. The legacy of Abenomics may be one of failure, but for Value investors at least, there is a silver lining.

Figure 1: Net Purchases of Japanese Stocks by Foreign Investors

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Source: Bloomberg, Man GLG; as of 31 May 2022.

Figure 2: Trade Weighted Value of the Yen

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Source: Refinitiv Datastream; as of 15 April 2022. Indexed to 100 as of 2010.

Low Vol Turns Normal – Which is Expensive

It seems intuitive that Low Volatility would outperform as a factor when markets turn tempestuous. This has indeed been the case so far in 2022, but Figure 1 demonstrates how far Low Volatility still has to go to recover after a prolonged drawdown that started in June 2016 as investors did not demand added calm in relatively placid markets.

The chart furthermore reveals that the only parallel for Low Volatility’s recent unpopularity is during the height of the Dotcom Bubble in 2000. If we experience a similar bounce, the factor has plenty of potential upside from here.

We must acknowledge that Low Volatility’s rally has made it more expensive (Figure 2). This is more a return to normality than an aberration, however; more often than not the factor has traded at a premium to global equities over the past two decades. The present premium is arguably also justified by stronger recent earnings revisions for Low Volatility stocks and the factor’s superior relative performance in previous periods of high inflation.

Figure 3: Low Vol Hasn’t Fully Recovered From the Drawdown

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Source: Bloomberg, Man Numeric; as of 31 May 2022.

Figure 4: Low Volatility Stocks Are Becoming Expensive Again

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Source: Bloomberg, Barra, Man Numeric; as of 31 May 2022.

Has Value Been Re-Valued?

After a strong year for Value, it is worth asking whether Value stocks are still cheap. One way of approaching the question is to measure whether the Value factor has fully recovered from its own drawdown. Despite hitting its deepest drawdown last year since the Dotcom Bubble ended in 2000, Value has now made back all its losses within the space of one year (Figure 5).

However, the earnings to price ('E/P') spread of Value has remained steady throughout this period. This indicates that while prices have recovered, they have not increased as a multiple of earnings (Figure 6). In other words, Value hasn’t been re-valued and the factor appears to be maintaining its fundamental ‘cheapness’ characteristic.

Figure 5: Drawdown in Global Value Barra Factor

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Source: Man Numeric; as of 31 May 2022.

Figure 6: E/P Spread of Selected Barra Factors (Global Top 3000 Stocks)

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Source: Man Numeric; as of 31 May 2022.

With contributions from: Jeff Atherton (Man GLG – Head of Japanese Equities), Valerie Xiang (Man Numeric – Senior Portfolio Analyst) and Rob Axelsen (Man Numeric – Senior Portfolio Analyst).

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