From 2003 to 2006, investors were well served with Japanese equity funds. Then in 2007, the average Japanese equity fund posted a loss of 6.42%, even as the S&P 500, a barometer of U.S. stock market performance, rose 6.77%. So what’s the outlook for 2008?
S&P’s International Equity Strategist Alec Young expects Japanese equities to continue to underperform other major equity asset classes throughout 2008.
“While below their long-term average, Japanese equity valuations remain elevated on a relative basis,” Young says. “At 15.7 times consensus estimated 2008 earnings, the S&P Topix 150, a good barometer of Japanese stock market performance, is trading at a significant premium to the S&P 500, which has a P/E of only 14.3%.”
Others disagree. Robert Smith, the international equity strategist at T. Rowe Price, says he considers price-to-book valuation a better indicator than P/E. And on a price-to-book basis, Japan, at 1.9 times, is cheaper than the S&P 500, at 3.0 times.