Monex Group Activist Forum Notes On Japanese Equities Part 1: N225 Trading Near Book Value – ValueWalk Premium
China-Japan Ties

Monex Group Activist Forum Notes On Japanese Equities Part 1: N225 Trading Near Book Value

Monex Group (Tokyo: 8698; best known for its eponymous online securities brokerage in Japan and TradeStation in the U.S.) hosted the activist investor forum — focused of course on investing in Japan — and its choice of venue was wise in terms of it having no problem utilizing the 800-person capacity theater seating space. I understand that CEO Matsumoto-san was slightly nervous given the topic, who he was able to get to agree to participate, and the goal of attracting as many retail investors as possible. As I had tweeted after the forum, thank you to Matsumoto-san and his team at Monex for hosting such an important forum.

Q1 hedge fund letters, conference, scoops etc

China-Japan Ties

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The Japanese media has basically tainted the minds of the Japanese people that activists are  greedy asset strippers. Some of the demands over the years could certainly be perceived that way (e.g. proposals for immediate, massive dividend hikes) especially if presented with only one side of the story. Another matter, the sentencing of Murakami-san was highly unfortunate and helped crush the positive momentum in the market that had been built broadly with the Koizumi Administration. As an aside, if you read Japanese, I highly recommend Murakami’s memoirs (2017). From my seat in the middle of everything, the audience seemed to be open minded, the majority raised hands when asked if they had voted on shareholder resolutions, and as I’ll comment later, they seemed to appreciate the activists’ points of view. No telling how many are Monex customers, or if that even matters re. the topic — the audience gave me hope and it will be interesting to see how the June AGMs unfold.

Monex did a live-stream as well for the first portion of the 4-hour forum (it didn’t air the individual fund presentations in the later afternoon), which had capacity up to 3,000 streamers. In fact, Monex and Matsumoto-san deserve much credit not only for a successful forum but also for taking the initiative to launch the idea in January. They have some solid industry supporters in their corner, some of whom were present — more on that later. Twenty members of the press were said to be in attendance. I need to check again, but I didn’t see anything published on the 20th when I was at the TSE flipping through the papers. Bottom-line: Matsumoto-san genuinely wants to see the market climb higher and believes retail investors have a meaningful role and say.

Matsumoto-san / Monex has noted that Japanese stocks fell as a whole (market) in 2018 for the first time since 2012. Combined with profit growth and what I imagine is a net decrease in shares from buybacks, not to mention higher dividend payouts to shareholders, valuations are once again at fairly extreme lows. Domestic retail investors own approx. 17% of the market.

Chief strategist outlook:

As a bonus, Monex’s chief strategist Hiroki-san was added to the agenda for a 30-minute talk before the official start of the program. He was to discuss the volatile market that has coincided with the start of the new imperial era in Japan, Reiwa (5/1). Pretty standard market talk and points for those who follow markets.

Hiroki-san’s opinion is that some sort of U.S.-China trade agreement will be reached in June at the G20 summit in Osaka. In terms of Japanese stocks, he commented on the rarity of the N225 trading below book value (“Lehman shock” and 3/11/2011 triple-disaster) which it will be poised to do in a further selloff (current P/B on 5/24: 1.06). He thinks that downside will be limited to the 5% variety (if I remember correctly) and double-digit upside more likely even with a modest multiple.

I heard pens scribbling furiously when his slide of Japanese stock ideas was unveiled. One point was cyclical stocks — he had spent some time talking about market cycles. Besides that, the obligatory themes were the highlights: AI, IoT, robots, big data, 5G and capex-related. I haven’t seen a publication in Japan that hasn’t been flashing these themes on their glossy covers. I didn’t bother to jot down much — pretty well known companies, but there is one idea I liked that I’ll hold for now since I’ve been working on it and have a related position I’ve been building.

Also, ironically, Monex itself may need a little nudge to get its stock price higher. I don’t follow the company so this is a generalization. It’s a very competitive industry, so seemingly consolidation is what’s really needed, but meantime Monex could continue to try to win with scale if it keeps putting its customers first. It will be important to balance that against system/IT capex. Will cryptos be a profitable growth area or a resource drain? A potential source of more clients and funds: the Japanese fund industriously is notoriously shameless in offering poorly conceived products typically chasing some overseas trend, charging kneecap-breaking rates. A more aggressive buyback program might be worth pursuing at these levels as well.

Fidelity — perhaps irrespective of the Activist Forum — dropped its stake in Monex to 3.59% (-1.63%) mid-week.

Summary of the panel discussion and individual presentations to be continued. 

Article by Steven Towns

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