Japan's Major Trading Companies Stocks Surge 320% Since 2020, Valuations at Historical Highs

Since 2020, the stock prices of Japan's five major trading companies have surged by an average of 320%, with valuation metrics reaching historical highs. Mitsubishi Corporation's 12-month forward price-to-earnings ratio has hit its highest level since 2005, while Itochu Corporation's price-to-book ratio has reached a new high since 2008. The valuation of these companies has been a topic of debate among investors, with some questioning whether the stocks are overvalued.

The recent increase in Berkshire Hathaway's stake in Mitsubishi Corporation has raised questions about whether the stocks are still a good investment. While some investors may be encouraged by the move, others are wary of the high valuations. Mitsubishi Corporation's 12-month forward price-to-earnings ratio is at its highest level since 2005, and Itochu Corporation's price-to-book ratio is at a new high since 2008. The TOPIX Wholesale Index, which covers the five major trading companies, has also reached its highest level in over a year.

Some analysts believe that the current valuations are too high for investors to enter the market aggressively. Hisashi Arakawa, who manages Japanese equities at Aberdeen Investments, stated that the current valuation levels are not conducive to aggressive buying of trading company stocks. Arakawa had initiated a position in Itochu Corporation around April but has no plans to increase it at the current price levels. Naoki Fujiwara, a senior fund manager at Sumitomo Mitsui Trust Asset Management, also noted that while the stocks may have been undervalued when Berkshire Hathaway initially invested, the situation has changed. He emphasized that the companies' earnings must keep pace with the stock prices, or else the stocks will face downward pressure.

Despite the high valuations, some opportunities may still exist for investors looking to enter the sector. For example, Sumitomo Corporation's forward price-to-earnings ratio has decreased from 59 times in 2020 to 8.9 times. However, analysts warn that slowing earnings growth could weigh on the sector's outlook. The trade policies of the U.S. President, the strengthening of the Japanese yen, and falling commodity prices could also put pressure on the companies' earnings.

Rieko Otsuka, a strategist at MCP Asset Management, noted that Berkshire Hathaway's continued signaling of its long-term investment in trading companies and increasing stake could provide support for the stock prices. However, with the uncertainty surrounding resource prices, exchange rates, and trade policies, it may be difficult to find a compelling reason to increase holdings in trading company stocks at current valuation levels.