Japanese Equities and the Four U's

Barton Biggs says Japan stocks are now attractive because the meet the "Four U's" criteria, i.e., they are underowned, undervalued, unloved and ugly.

As for underowned, the Rueters Asset Allocation surveys indicate that European and UK investors are if anything neutral to overweight Japan stocks, while the US investors surveyed appear to have more money allocated to non-Japan Asia than they have in Japan.

As for undervalued, Japanese stocks are not-so-cheap anymore, as the Nikkei 225 PER on forward earnings is now around 41.1, the dividend yield is 1.38% and the PBR is 1.36X. The earnings yield at 2.64% however is still well above a long bond yield of 1.30%. Asian markets like China and South Korea are trading at 16~17X, while other markets in the region trade under 20X earnings, with arguably better medium-term growth prospects. Japan's PER is still being skewed by depressed earnings in the automobile and electronic sectors, as exports through July were still weak.

However, it does appear that Japanese stocks are benefiting from investors backing away from China exposure, especially for short-term investors chasing alpha.