Faced with ongoing uncertainty and volatility, global macroeconomic commentators are in two distinct camps: one that observes symptoms of recession and another that observes signs of a global recovery.
We observe the market has already priced in the shorter-term cyclical symptoms of recession for a wide range of Japanese companies.
Corporate Japan is not immune from the global macroeconomic cycle, as observed by downward earnings revisions in recent months.
However, the market's shorter-term cyclical risk perceptions ignore the structural changes leading to rising longer-term trend returns and the potential unlocking of value in Japan.
Extreme investor behaviour has also driven a standout valuation exception in Japan. Uncertainty from cyclical earnings risk has led to even shorter-term investor timeframes.
In seeking out comfort, investors are herding around a narrow range of companies offering perceived certainty of short-term earnings growth.
These defensive companies are extremely expensive, reflecting a risk perception that prevailing conditions are permanent. Investors are ignoring this significant valuation dislocation at their peril. The risks are to the downside for these expensively valued stocks and are to be avoided.
Amid this environment, the market has yet to fully appreciate corporate Japan's restructuring efforts. Changes in corporate behaviour has progressively translated into higher operational efficiency and improved trend profitability.
The gap between trend profit margins for Japanese corporates and the rest of world has narrowed. Over the past four years, Japanese earnings per share growth has been rising faster than in other developed markets.
Corporate Japan is generating more cash flow and is increasing dividends and share buybacks. There has been a 154% year-on-year growth in buybacks during the January-March period.
This rising shareholder returns focus offers further potential for unlocking of value in Japan.
While this is encouraging corporate behaviour, we still see significant scope for the adoption of best practices.
Dean Cashman is portfolio manager at Eastspring Investments
• Market has already priced in negative risk perceptions around shorter-term cyclicality of earnings in Japan
• Ongoing restructuring efforts drive improving trend returns that warrant a market re-rating
• Shorter term risk perceptions continue to impact investor sentiment
• Investor preferences do not always reflect the intrinsic trend value of companies