Builders Best Japan Stocks Since Quake: Riskless ReturnYoshiaki Nohara and Masaaki Iwamoto
Construction companies posted the best risk-adjusted returns among Japanese stocks since the country was struck by a record earthquake and tsunami almost two years ago, as the government rebuilt infrastructure and a new administration seeks to stimulate economic growth.
The Topix Construction Index returned a risk-adjusted 2 percent at the end of last month since March 10, 2011, the day before the disaster, best among 33 industry groups in the Topix Index, according to BLOOMBERG RISKLESS RETURN RANKING. The construction gauge had the best total return and the ninth-lowest volatility, allowing the industry to outperform food and pharmaceutical companies, as well as the Bloomberg World Engineering & Construction Index.
Companies such as Obayashi Corp., the nation’s biggest builder by market value, are poised to benefit from 3.8 trillion yen ($41 billion) pledged for rebuilding and disaster prevention by Prime Minister Shinzo Abe’s new government on Jan. 11, on top of 19 trillion yen already budgeted. A tunnel collapse that killed nine people in December added impetus for infrastructure investment, a policy staple during the Liberal Democratic Party’s almost six decades of rule.
“The LDP will aim for steady economic growth in an orthodox way,” said Masaru Hamasaki, chief strategist at Toyota Asset Management Co., which oversees about 1.79 trillion yen. “Public works investment will be robust in the long-term when you consider the government’s plan to strengthen infrastructure. That’s highly likely to give construction companies a stable revenue source.”
The 94-member Topix construction group had a total return of 41 percent including dividends since the day before the earthquake through last month. The gauge’s volatility was 21 during that span, compared with the average of 26 for the 33 Topix groups.
The Bloomberg World Engineering & Construction Index, a capitalization-weighted index of leading engineering and construction stocks, had a risk-adjusted 0.3 percent loss in the same period.
The Topix, the broadest measure of Japanese equities, gained 0.3 percent in that period, adjusting for price swings. Pharmaceutical companies had the second-best return at 1.9 percent. The construction gauge traded at 18.2 times estimated earnings, compared with 19.7 for the Topix, which capped a 12-week advance on Feb. 1, the longest weekly winning streak since 1973.
The Topix Electric Power & Gas Index was the second-worst performer after airlines, with a total loss of 49 percent and the fourth-highest volatility since the earthquake. The gauge has fallen since the meltdowns at Tokyo Electric Power Co.’s Fukushima plant prompted the shutdown of the nation’s reactors on safety concerns.
The risk-adjusted return, which isn’t annualized, is calculated by dividing gains from stock appreciation and dividends by volatility, providing a measure of performance per unit of risk. Higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
Abe returned to power in December and aims to lead Japan out of its third recession in five years, introducing 10.3 trillion yen in stimulus. His support for aggressive monetary easing has helped the yen slide to its weakest against the dollar since May 2010, driving the Nikkei 225 Stock Average to the highest since April 2010. A falling Japanese currency boosts overseas earnings.
Construction companies were fed by the rebuilding binge after World War II. Large builders contributed generously to Liberal Democratic Party candidates during Japan’s ascent to economic superpower. Bridges and roads to nowhere are a testament to how central building projects are to the party’s economic policy.
Taro Aso, the son of a cement magnate and a former prime minister, was last month named Japan’s finance chief. He joined family company Aso Industries in 1966 and rose to president and chief executive of Aso Cement Co. before entering politics in 1979, according to his website.
During his 12 months as prime minister through September 2009, Aso compiled three extra budgets worth about 20 trillion yen, abandoned a target to balance the budget by March 2012 and distributed a 12,000 yen-per-person cash handout. Among the elements in Aso’s record 15.4-trillion yen stimulus package unveiled in April 2009 was 12.4 billion yen to get rid of fishing gear dumped by foreign boats and 400 million yen for cutting down trees to keep “beasts and birds” out of towns.
Abe’s stimulus may stoke concern about the new government’s commitment to fiscal reform given that Japan’s public debt is more than twice the size of the economy.
“You can’t keep expanding public works when you think about Japan’s fiscal situation,” said Isao Kubo, a Tokyo-based equity strategist at Nissay Asset Management Corp., which oversees about 5 trillion yen. “There’s been support for construction stocks since the earthquake, but I don’t think it will last long.”
The construction group has advanced 23 percent since Nov. 14, when national elections were announced on optimism a new government would spend more on infrastructure. While the gauge rose to a five-year high last month, brokerages and steelmakers did even better as investors sought riskier assets amid a 30 percent rally in the Topix.
“The sector may be in a short-term correction after rising too fast and a weaker yen gives preference to export-related stocks,” said Masahiro Mochizuki, a Tokyo-based analyst at Credit Suisse Group AG.
The 2011 earthquake was the biggest in Japan’s history, exceeding the Kobe temblor on Jan. 17, 1995. The construction group had a 0.6 percent risk-adjusted return in the year after Kobe, the eighth-highest among the Topix’s 33 groups, according to data compiled by Bloomberg.
“Back then, people viewed public works as wasteful spending,” Mochizuki said. Now, “public opinion is supportive of maintaining and repairing infrastructure after cutting back too much.”
Even before the quake and the elections, construction was among the top industries by risk-adjusted return. Volatility for construction shares tends to be low because they’re among so-called defensive stocks whose earnings are resilient to global economic cycles, Mochizuki said.
Builders had the second-best risk-adjusted return among industry groups in the Topix since the end of 2007 as of yesterday, trailing only rubber companies.
With the LDP in power again, builders may also benefit as the government considers extending a mortgage tax break and other incentives to purchase a home. Home purchases may rise before consumption-tax increases begin in 2014, according to Akihiro Tsunoda, a Tokyo-based senior investment manager at Sompo Japan Nipponkoa Asset Management Co., which oversees about 300 billion yen.
Daiwa House Industry Co., a home builder, is the heaviest weighed stock in the Topix Construction Index. The stock has surged 40 percent since elections were announced in November.
“The political wind and aging infrastructure are positive for the sector,” Tsunoda said. “We are hearing about housing tax breaks. There may also be last-minute buying ahead of a sales tax hike. Sales outlook won’t be bad at least for the next few years.”