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Valuations Remain A Hurdle In Japan

Aug. 05, 2018 1:30 PM ETHOCPY, ASBRY
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By Brent Bates, Senior Portfolio Manager on Aug. 3, 2018, in Equities

However, we’ve uncovered two recent opportunities that meet our criteria.

Japan has been a market where investors have been buying growth at all costs, and the opportunity set remains limited from a valuation perspective, in our view. However, the Invesco International and Global Growth team has been able to identify select opportunities so far this year. Invesco International Growth Fund (AIIEX) remains underweight Japan, but we added to our exposure in the second quarter in companies that meet our Earnings, Quality and Valuation (EQV) criteria.

To begin, let's put the valuation picture in perspective. The top-contributing stocks for the MSCI All Country World ex-U.S. Growth Index include Japanese companies Shiseido (OTCPK:SSDOY), Fast Retailing (OTCPK:FRCOY) and Recruit (OTCPK:RCRUY), which have forward price-to-earnings (P/E) ratios of 40x, 31x and 30x, respectively.1 (None of these are fund holdings as of June 30, 2018). Throughout Japan, large-cap companies that have a return on equity (ROE) of 15% or better are trading at an average next-twelve-months (NTM) P/E of 25x, whereas our two recent initiations came with NTM P/Es of less than 17x.2

A new opportunity in Japan

In the second quarter, we initiated a position in Hoya Corp. (OTCPK:HOCPY), a global leader in technology components such as photomask blanks for semiconductors and glass disks for hard disk drives, as well as eyeglass lenses (1.48% of Invesco International Growth Fund as of June 30, 2018).

This is a business that has generated ROE in the high teens, despite having 10% of the market cap in net cash, yet we were able to begin accumulating shares at an attractive valuation with an ex-cash NTM P/E of 16x.3

Hoya holds a dominant No. 1 position with more than 50% market share, and in some cases, it is the monopoly

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Invesco is an independent investment management firm dedicated to delivering an investment experience that helps people get more out of life.Be the first to know! Sign up for Invesco US Blog and get expert investment views as they post.Disclosure for all Invesco US articles: Before investing, carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE All data provided by Invesco unless otherwise noted. Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. ©2015 Invesco Ltd. All rights reserved.

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