Insights & news

• The Stewardship Code requires investors to engage with investee companies

• Much of the corporate governance reform in Japan is aimed at promoting “sustainable growth of companies”

• The Stewardship Code has provided shareholders with a platform for engagement and increased focus on shareholder returns

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• There is a fundamental shift occurring in corporate Japan that is being driven by governance reform – and momentum is strong

• The Japanese Corporate Governance Code aims to promote “sustainable growth and increase corporate value”

• More than 50% of Japanese companies now have more than one-third independent directors, up from less than 10% seven years ago

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• 55% of non-financial companies in the Japanese Topix Index have net-cash balance sheets compared to just 15% in the S&P500

• Real earnings growth in Japan has outpaced the US since 1993, without leveraging up balance sheets

• Japan trades on average at a 26% discount to the US market on forward P/E and is 32% cheaper than global markets based on Enterprise value / EBITDA

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• Investors have become ‘comfortably numb’ to expensive valuations. Valuations in technology now rival the 2000 bubble with all the commensurate risks

• Until the past few weeks, the average stock globally was down nearly 20% year-to-date; weakness is masked at the broader index level by the outperformance of a few mega-caps

• The world is not short of challenges. In some investment markets, challenges are offset by depressed valuations

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• The extraordinary policy response to the COVID-19 virus outbreak suggests that the era of deflation is coming to a close. Money supply and bank lending have expanded dramatically

• Governments are strongly incentivised to keep interest rates low – even if inflation rises

• Inflation > interest rates = financial repression

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• The NASDAQ Index demonstrates the enormous entrepreneurial drive found in American capitalism, but a study of underlying valuations highlights the reckless abandonment of rational judgement.

• As the global economy deteriorated in the six-months to June 30th, the top 20 NASDAQ performers included 18  companies that lost money over the prior 12 months.

• The largest 20 names in the NASDAQ sell at an average of 8x revenue, or equivalent to the market value of all stocks in France, Germany, Italy, Spain and the UK combined.

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• The spread between company dividend yields and 10-year government yields is now the widest in history.

• On average, dividends contribute approximately one-third of total sharemarket returns.

• Companies with too much debt will be at greater risk of cutting their dividend. 

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• Excluding the US, many company valuations are similar to the Global Financial Crisis lows in 2008, and are lower compared to other previous crises.

• Given the synchronised global economic rout, sustainable business models and  the strength of balance sheets and cash flows will be paramount.

• The current crisis will expose pre-existing weaknesses in companies and economies.

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• Rather than projecting ahead, often there is greater value in observing where we are today to evaluate risks and opportunities.

• Indicators suggest that the US represents a huge risk for global equity investors, while the UK provides a compelling opportunity.

• Benchmark agnostic investment managers are well placed to benefit from mispricing and dislocations in global markets.

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• Bond prices are supposed to reflect credit and interest rate risk, as well as growth and inflation. Bonds arguably represent the biggest financial bubble of all time.

• Private sector financial assets in the US are now near a record and global corporate bond issuance reached a record US$300 BN in September.

• The discrepancy between bond yields and equity yields is now so significant that equities offering sustainable dividends are likely to attract significant investor interest.

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• Global equity investors can defensively position their portfolios for a ‘value’ renaissance, and collect a 4% income yield while they wait.

• Like other regions, there is a huge valuation discrepancy between ‘value’ and ‘growth’ equities in Europe.

• A catalyst to change the valuation discrepancy between ‘value’ and ‘growth’ is likely to be either a widening of credit spreads or an increase in interest rates.

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• Some Asian companies are cheaper than they were during the Global Financial Crisis or the Asian Financial Crisis.

• Companies with low valuations, strong cash flows and strong balance sheets are being overlooked.

• Currency is a risk that needs to be managed.

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• Never have we seen a period where value has underperformed growth over such a long period and to the extent it has recently…other than the Great Depression.

• Quantitative easing has provided a tailwind for growth companies. Valuation dispersions exist that are reminiscent of the 2000 internet bubble.

• “There has never been a better time to be a global value investor.”

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• Global Debt to GDP is significantly higher than before the GFC – driven by governments and the non-financial corporate sector.

• Almost 50% of US investment-grade corporate bonds are rated BBB, the lowest investment-grade rating.

• Headwinds emerging in corporate America are clear, but there are extraordinarily attractive investment opportunities outside the US.

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• Rising interest rates may precipitate the biggest risk-off trade of our life-time. Emerging markets were the first casualty in 2018.

• A corporate bond tsunami is on the horizon in the US, which will have major implications for equity markets.

• Significant declines in emerging markets has left some attractive opportunities in these markets.

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