After all, even the stormiest conditions are supposed to take a turn for the better sooner or later, aren’t they? Not if things have gotten bad enough, according to Tasker. “At some point, conditions improve. You see the fundamentals start to turn positive,” he said. “And guess what? Nothing happens, because nobody is there. Nobody is watching. That is the most soul-destroying part.”
That’s in part because Japan’s crash was so severe that it decimated broad swaths of its financial industry, Tasker said – jobs that have not returned. Tasker couldn’t help ribbing his audience for the dire headlines in London, where he was speaking, reporting that financial jobs are down 6% since the 2008 crash. “Luxury!” Tasker joked.
Meanwhile, uncertainty abounds. Lack of growth in overall economy means “much greater profit volatility” and therefore more cost-cutting for Japanese companies. The kind of lifetime-with-a-single-company employment that Japan is known for “now applies to a very small segment of the Japanese workforce,” Tasker noted, adding that more than a third of Japanese workers are now employed on significantly less secure part-time contracts.
All of which has meant shaken faith in the fundamental role of equity markets. Japanese households these days keep more than half their assets in cash or cash equivalents, Tasker noted. Companies keep “balance sheets stuffed with cash,” which they are reluctant to bring to market. And Japanese investors find they rarely have anywhere to turn to eke out even meager returns, thanks to the disadvantages of investing in yen.
“Japanese pension funds have a required return of around 2% or 3% a year, and they have a great deal of difficulty in making it every year, because everything from the yen point of view looks terrible,” Tasker said. “So it is not just Japan that is deflating. From the Japanese angle, the Japanese perspective, the entire world is deflating.”
The name of the game is value
In such an environment, what works well is somewhat counterintuitive: In Tasker’s experience, value investing the way to go.
Tasker said that his experience contradicts those who might argue that in a stagnant, risky marketplace, “more companies are going to go bust, are going to need restructuring, are going to need to issue more equity as you get into more financial difficulties,” rendering value stocks a bad bet.
On the contrary, Tasker said, these stocks have greatly outperformed expectations, while safer-looking growth stocks have shown themselves to be much more vulnerable to the vagaries of a persistently sour economy.
“Bad markets are about surprise and they are about de-rating,” he said. “What gets de-rated is the stuff that is highly rated. The stuff that is lowly rated has got that much less of a hurdle to jump and that much less potential to be de-rated.”
By way of example, he recalled that in 2003, shortly after Japan experienced its second banking crisis in less than a decade, the press widely publicized a group of companies, dubbed the “Dirty 30,” which were supposed to be on the verge of inevitable bankruptcies in the wake of the crisis. “A couple of those 30 companies did in fact go bust,” Tasker said. “The remaining 27 or 28 quadrupled and quintupled stock prices.”