Economics & Strategy — Quantitative Research: Third

Debuting in third place is Keiichi Ito of SMBC Nikko Securities. In September the researcher appraised the Japanese stock market using dividend-discount and residual-income models, concluding that equities were “heavily undervalued,” the discounting had been deepening since March, and “share prices would have to roughly double from current levels to bring the market risk premium down to the average for 2002–’10.” A loss of liquidity had spurred deterioration in both beta and price-to-book factor returns, he recalls, but rising investor interest was signaling a reversal that would become evident in the quarter ending in December. “We see a strong likelihood that factor returns for price-to-book will outperform price-to-earnings” through the end of the year, he told clients. Good call. “High-beta and high-price-to-book stocks have outperformed strongly in the share price rally that began in mid-November,” he reported in January, noting that another about-face was imminent and that price-to-earnings was poised to become the most effective value factor. “From our risk-premium analysis, the autos sector still implies a higher risk premium than other sectors, so I recommend it,” Ito says. Not recommended: electric power companies. “While Ito-san is a quants specialist, he always tries to work closely with strategists and analysts at SMBC Nikko,” says one supporter. “That makes his presentations and messages very practical for us.”. — Thomas W. Johnson