Japanese stocks: Observe whether premium stocks continue to dominate
2023-02-27
■ The Tokyo Stock Exchange requires listed companies to promote operations that focus on capital costs and share prices
■ Observe the trend of the Tokyo Stock Exchange to see whether the prevailing trend of low-price stocks will continue
The "follow-up meeting of market segmentation review" of the Tokyo Stock Exchange is being held. The main purpose is to consider improving the restructuring of the market department of the Tokyo Stock Exchange, which began on April 4, 2022 and will continue on July 29, 2022. At the 8th meeting held on February 15, 2023, the requirements for promoting the operation and management focusing on capital cost and share price were put forward, which is expected to be notified this spring. Specifically, listed companies are required to accurately grasp their own capital cost and return on capital, and disclose their policies, measures and improvement progress. It is said that companies that are less than 1 times will be particularly strongly required.
Therefore, corporate governance reforms in Japanese companies, which have been progressing slowly, may make rapid progress. PBR is the rate of return on proprietary capital (ROE) × the rate of return on stock price (PER). To increase PBR, it is necessary to improve ROE or increase PER. ROE is calculated by net profit/self-owned capital in the current period. The increase of ROE requires the expansion of net profit in the current period or the compression of self-owned capital. As a short-term solution to the TSE’s measures, it is easy to choose to reduce its own capital, and expect companies with low ROE and PBR below 1 time to increase their purchases of our company’s stocks. Therefore, hunting for cheap stocks is now more active.
However, due to the lack of sustainability of such capital strategies, in order to improve ROE in the long term, listed companies are required to develop growth strategies that are linked to the improvement of essential profitability (interest expansion strategy), which takes time to implement. In addition, on the basis of recognizing whether the terrain of premium stock advantage is sustainable, the content of the request of the East Securities Exchange scheduled to be notified this spring has attracted much attention.