Friday, December 02, 2005

Topix 2nd Section Hits All-Time High

Pop the champagne corks everyone! In a little noted event the TOPIX Second Section index has surpassed YEN 4500 in latte November, and thus has clocked an all-time high! That's right, higher than in early 1990 when a a handerkerchief-sized piece of Tokyo was emminently more valuable than the entire Isle of Sheppey.

According to Bloomberg this equates to 121x trailing earnings, 26x forecast earnings, 1.6x book and 8.1x cashFlow. These remain undemanding by way of comparisons to the US market (S&P's "MID" Index stood at 20x forecast earnings, 2.6x book, and 11.4x cashflow). On the other hand, this is Japan, and the owner of many TSE2 securities also finds themselves essentially as a minority shareholder.

Should this command a discount? First thing to remember, despite all of the hyperbole surrounding change in Japan is that in Japan's version of Capitalism, the Shareholder is but one constituent alongside, but not necessarily superior to, workers, customers, suppliers, and government and the community at large. The SHareholder is becoming more important, but doesn't sit atop the pile by any stretch.

Second thing to remember is that as a minority shareholder, one is often "taken under" rather than taken over. This is to say that the minority shareholder seldom achieves fair value when consolidation, divestiture or acquisition is taking place, since these transactions are typically done in the interests of the controlling shareholder. This is far from the situation in America, and warrants some nebulous discount. How much? Who knows. Damodaran has some novel views on this and would be wise to consult his site on my links sidebar.

But my main point is to bring attention to the tardiness of the media's recognition of "Japan's Re-Emergence", and phenomena more than three years old, and as the chart above indicates, far far less cheap than it was but 24 months ago. Bargain hunting? It may be wiser to start in Korea, or at least be very discriminating when looking at the fruit that remains on tree on the TSE.

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