Where in the World Are the Best Valuations?
On Behind the Markets, a podcast brought to you by Jeremy Schwartz, WisdomTree Global Head of Research, we talk to market strategists, business executives and financial advisors about important trends underpinning the financial markets.
In this episode, Jeremy talks to Sailesh Radha, co-founder and chief investment strategist of Borealis Global Advisory, and Drew Edwards, head of GMO’s Usonian Japan Equity team.
In the first half of the podcast, we spoke with Sailesh Radha. We covered the following range of topics:
- Radha’s use of a “Smart CAPE” (cyclically adjusted price-to-earnings ratio) and real exchange rate model to rank and rotate equity investments among the most attractive countries.
- How his real adjusted exchange rate model can support valuations, with countries becoming more competitive via exports and stronger earnings growth.
- Why Radha’s model currently favors Japan, Singapore, Korea and a number of European and Scandinavian countries while avoiding the United Kingdom, Taiwan and New Zealand.
- Why Radha likes Japan for both elements in his model. He sees a strong decade ahead of increased productivity, higher earnings growth and valuations being really low relative to history.
In the second half of the show, we explore Japan in more detail with Edwards.
- GMO and Edwards’s team model global opportunities using a top-down and bottom-up process. GMO notably believes the U.S. market faces a tough seven-year stretch ahead, but Japanese assets, and in particular Japan value and small-cap value, represent an “island of potential in a sea of expensive assets.”1
- Edwards arrived in Japan as a college student and experienced the hangover from the bubble and party that occurred in 1980s. But now he sees the benefits of many years of hard work to restructure the economy. He recognizes many positive potential catalysts, from corporate governance reforms and improving returns on capital to broader cultural shifts.
- Historically, return on capital in the U.S. averaged 6% and Japan only averaged 3%. But these rates have converged, and the GMO team thinks we are now in a new regime of higher returns on capital in Japan.
- Edwards says the lowest-hanging fruit for Japanese companies is to deploy their excess cash, and there are a few places they are doing this: increasing buybacks, dividends and consolidation of industries. With high excess capital remaining, there are opportunities for better returns.
- Edwards’s team likes many of the Japanese small-cap industrial companies for leadership in niche parts of the value chain, but also because they are cyclically tied to an acceleration of global growth as the economy continues to reopen.
- We also talked about macro issues ranging from demographics and inflation to whether the Bank of Japan will ever end their policy of purchasing ETFs.
Please listen to the full conversation below.