With the major financials in Japan, should one go with the leaders or with the laggards? So e.g. Aozora or Mitsubishi UFJ or Mizuho Financial?

Eoin Treacy's view

Thank you for this question of general interest. The issue of whether to back leaders or laggards is an important one and will be largely dictated by where we are in the overall cycle. 

Following a major decline, companies that exhibit early relative and absolute strength are highly favoured because they were less affected by the factors that caused the decline and generally benefit most from whatever the new bull market phenomena is. In this case they represent better bets than laggards even though they might be more expensive on a P/E basis because we do not know who long the laggard might spend in convalescence. 

When a major bull market is maturing, the early leaders will often top first because they are most sensitive to changes in the crowd dynamic that animated investor interest. Valuations will have expanded and value investors will be casting around for instruments that are still cheap. This is perhaps the most attractive time to become interested in lagging shares and sectors because weight of money can contribute to powerful catch-up moves. 

Japan’s bull market is a little more than a year old and Aozora Bank has been trending higher for much longer than that. The share’s valuations at an Estimated P/E of 10.63 and dividend yield of 4.35% are not challenging and while it is somewhat overbought in the short term, nothing has occurred to challenge the consistency of the medium-term uptrend. 

Minato Bank (P/E 10.17, DY 2.66%) has a similar pattern.

Both Mitsubishi UFJ (Est P/E 9.31, DY 2.57%) and Mizuho (Est P/E 9.33, DY 3.37%) are forming first steps above their respective bases and are currently bouncing from the lower sides. 

All three have bull market characteristics. If you are looking at the question as an investor looking for Japanese exposure I believe in this case it is better to still give the benefit of the doubt to performance not least because Aozora’ s consistency is delivering the greater risk-adjusted return. If you are a global investor looking for value plays in an environment where the majority of risk assets are no longer cheap, any of the above shares are interesting. When laggards eventually reassert their medium-term uptrends their breakout are likely to be powerful. 

A point I’ve made a few times in the Comment of the Day over the last few weeks is that Japan’s regional banks are outperforming the supranational sector. One of the reasons for this is that they are not saddled with the legacy of bad debts and government interference of their larger competitors.