Steve Kuhn of Pine River Capital Management, a $15 billion relative value hedge fund, likes Japan.
Kuhn formerly traded Japanese convertible bonds on the night desk at Citadel in Chicago for three years before joining Pine River. “I know the space well,” he said, as he explained why he liked Japanese stocks on a relative value basis when compared to government bonds issued by the island nation.
Steve Kuhn on Japanese bonds vs stocks
Kuhn modeled the value of the Japanese ten year bond by converting it into a “stock,” painting a picture of what it would look like. If the Japanese ten year bond was a stock it would be trading at 220 times earnings, Kuhn speculated. Compare this to the Japanese stock market, which trades at 12 times earnings. Japanese stock are still cheap relative to bonds, Japanese corporate governance is changing and boring stocks are beautiful in this relative value trade.
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With regards to stocks, Kuhn notes the world’s third largest economy is becoming more competitive. In particular, he likes stocks who are included JPNK400 index, known as the “shame index.” Companies included in this index must make moves to prove their primary objective is to think about shareholders. Kuhn says investors seldom get the benefit of holding the stock, as the company is typically operated for the good of the employees and society. “Even good companies at the end of the year tend to burn their profits.”
It is this turn to what Kuhn considers proper corporate governance in Japan that gets Kuhn most excited. He sees more external directors being appointed (62% of companies have outside directors), dividend payments are increasing along with share buybacks and the number of takeover defenses, poison pills, are being eliminated.
A simple way to play this trend, Steve Kuhn noted at the Invest for Kids conference, was using the JPNK400 index.
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