While the hot investing money pours into China, Japanese stocks look underpriced despite signs that country's economy is finally picking up. Here are 4 reasons to bet on Japan.
While China may be everyone's favorite emerging-market investment right now, another "emerging" economy could outshine it this year -- the economy of China's historical rival, Japan.
Yes, Japan, which was the soaring economic superstar China is now before things unraveled two decades ago. It remains a country that most investors hate, with a laundry list of lingering problems that include an enormous national debt, an aging population and persistent deflation.
Lessons from Japan's economic meltdown
But there are also signs Japan is emerging from its long economic winter. And all it's going to take is a little good news for Japanese stocks to reward investors, probably much more than Chinese stocks will over the next year or two. That's because Chinese stocks look overpriced given that the country -- which just raised interest rates and may need to do more to try to slow its 9% annual economic growth rate -- has been such a favorite hot-money destination.Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 300, 213, {"configCsid": "MSNmoney", "configName": "player-money-articles-16x9", "player.vcq": "videoByUuids.aspx?uuids=73859bb1-df01-4cce-9fd5-55c8f90229a1,98c2d457-5ce7-4497-aee3-b3322abbe8db,5b0f70fe-5099-484b-b989-eaf2f3bcaf9c,ec0aec01-f630-49cd-90c0-a68d5632d936,b14c1b45-3062-49c0-aa86-6ad692028e38,44468617-68b9-4c85-9546-61f6cb6dc35f,0e4d7175-5d23-4bed-a795-c26e1baf488f,cb1bf6f0-85b7-4bcc-ae07-e4f312e902c9,2619313b-b990-4c0f-8679-0b32f7d931df,f0cd6ecd-0ff0-410b-865a-49c3cda19b12", "player.fr": "iv2_en-us_money_article_16x9-xxx-xxx"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=73859bb1-df01-4cce-9fd5-55c8f90229a1,98c2d457-5ce7-4497-aee3-b3322abbe8db,5b0f70fe-5099-484b-b989-eaf2f3bcaf9c,ec0aec01-f630-49cd-90c0-a68d5632d936,b14c1b45-3062-49c0-aa86-6ad692028e38,44468617-68b9-4c85-9546-61f6cb6dc35f,0e4d7175-5d23-4bed-a795-c26e1baf488f,cb1bf6f0-85b7-4bcc-ae07-e4f312e902c9,2619313b-b990-4c0f-8679-0b32f7d931df,f0cd6ecd-0ff0-410b-865a-49c3cda19b12;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4'); "You can go through the list of all the things that have gone wrong in Japan," says Neil Hennessy, of the Hennessy Select SPARX Japan Smaller Companies Fund (SPJSX) and Hennessy Select SPARX Japan Fund (SPXJX), which are already outperforming the markets and most mutual funds. But, he asks, what happens if things there start to go right?
So what exactly could go right for Japan? Let's take a look. A weakening Chinese yuan Because Japan's economy, like China's, is built on exports, growth in China will create demand for goods from Japanese companies, lifting Japanese stocks over the next year or two. There's an important twist that will make this play out: The Chinese yuan is going to rise in value against the yen.
A stronger yuan amps up Chinese demand for Japanese stuff because it gives Chinese consumers and companies extra buying power. China's emerging middle class wants the same consumer goodies that well-off people around the world want -- like the flat-screen TVs and cars that Japanese companies make so well.
Why will the yuan go up in value? First, China is under considerable pressure from the U.S. and other countries to stop artificially suppressing the value of its currency. That's been a deliberate tactic to help China's own exporters over the years. But it hurts domestic competitors in the U.S. and Europe, and those countries are complaining.
Second, Chinese politicians are now worried about inflation, which can spark civil unrest if it gets out of hand. A stronger yuan is a great weapon against domestic inflation, because it cools off foreign demand for Chinese goods. It makes Chinese goods look more expensive, and less desirable, to foreigners. So they buy less, which reduces upward pressure on prices for Chinese goods. Reasonable growth ahead Here's another thing that could go right for Japan: The country's economy may actually post at least a reasonable 2% annual growth over the next two years. Besides demand from China and other hot emerging markets in Asia, Fed actions to boost the U.S. economy will benefit Japan.
Now, 2% growth may not sound like much. But don't forget, it won't take much growth to boost Japanese stocks. One reason is that Japanese companies are lean after so many years of cost-cutting to cope with a strong yen, which hurt their sales abroad.
And, underneath all this, Japanese stocks are just really cheap because of years of neglect. That makes them a great contrarian play -- a bet that will pay off once the investing crowd changes its mind and takes an interest in Japan. "Most money managers are underweight Japan," says James Dailey, portfolio manager of the TEAM Asset Strategy Fund (TEAMX), which is placing bets on a rebound in stocks there. "You could get massive money flows in." Stealth China plays Oddly, the cheapness of Japanese stocks is a part of an optical illusion that's tricking investors into missing out on the opportunity. While many investors avoid Japanese companies because of problems in Japan, a lot of these companies are really China plays in disguise, because they export so much to China. The bottom line: That makes them a deceptively cheap way to play China growth.
To play a rebound in Japanese stocks, you can buy any of the mutual funds I mention in this column, because they all have exposure to the country. Or you can try your hand at individual companies. I asked the managers of these funds to suggest some of their favorite Japanese stocks buyable on U.S. exchanges.
Now, here's a roundup of the main reasons to buy Japanese stocks now, with the stocks to buy to play these reasons. Reason No. 1: Japanese stocks are unloved and cheap Contrarian investors like Warren Buffett beat the markets by venturing into disliked sectors. They know that in the ever-changing cycles of the market, out-of-favor areas become popular again sooner or later. The rush of money that comes in as the tide of investor opinion turns can produce great returns.
Japanese stocks fit the cheap-and-unloved bill now. Direct comparisons based on price and earnings are tough because of accounting differences in the U.S. and Japan, so let's look at this a different way. U.S. stocks are as cheap as they've been since the early 1950s right now, considering the low levels of inflation and interest rates, says Wells Capital Management strategist James Paulsen. Japanese stocks look even cheaper. Their relative value against U.S. stocks has fallen to its lowest level since the early 1950s, says JPMorgan Chase analyst Hajime Kitano. "We think both absolute and relative valuations are now attractive," he says.
Here's another measure that shows how cheap Japanese stocks are. Investors pay $1.80 for a dollar of corporate revenue in the stock markets of Brazil, Russia, India and China, those popular BRIC emerging-market economies. In the Japanese stock market, you pay just 60 cents for a dollar of corporate revenue, Hennessy says.
One example is Itochu (ITOCY, news, msgs). A conglomerate, Itochu gets a very big part of its revenue by selling metals and raw materials in high-growth countries like China. For raw materials, Itochu has similar costs as BHP Billiton (BHP, news, msgs), because it is a joint venture partner with that mining company. But it has a dramatically lower valuation, points out Ned Gray of the Delaware International Value Equity Fund (DEGIX), which owns Itochu. Besides selling raw materials to China, Itochu sells packaged food, textiles, chemicals and industrial components there. In short, it is a China play, but on the cheap.
Note that Itochu, like several of the stocks in this column, trades as a pink sheet stock in the U.S., not trading on a major exchange. While I normally advise extreme caution with such stocks, these are all well-established Japanese companies, so the normal concerns do not apply. This one is thinly traded, however, so buying enough shares to establish a position -- and selling down the road -- may require patience.
Continued: Stemming persistent deflation in JapanMore from MSN Money
Top pros' top stocks for 201110 hot stocks for a cold winter10 picks for the epic bull marketJim Cramer's top 10 Dow stocks for 2011Keep an eye on gold, bonds in 20111 | 2 | next >
Rate this Article Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). LowThank you for rating.UGR('ratCntrl')High var avgRating=0;avgRating=6.689655; if(avgRating!=0){avgRating=avgRating/2;avgRating=Math.round(avgRating*100)/100;var sDisplayText="Average rating: " + avgRating + " from ";var usersCount=29;sDisplayText = sDisplayText + usersCount;if (usersCount==1)sDisplayText=sDisplayText + " user";else sDisplayText=sDisplayText + " users";avgRatingElem=document.getElementById("averageRating");avgRatingElem.innerText=sDisplayText;} View all top-rated articlesE-mail us your comments on this article Discuss in a message board Most Recent ArticlesWhy Japanese stocks look temptingBest Vanguard funds for your 401kIndex funds becoming harder to beat?Can Europe save the euro?5 funds the bad market couldn't touchMSN Money InsightNew Investor CenterMarket DispatchesJubak's JournalTop Stocks blogCompany FocusContrarian ChroniclesSmart Spending blogFast AnswersDecision CentersMutual FundsFind Hot StocksSimple StrategiesPower ToolsInvesting for IncomeReal Estate InvestingRecent Articles by Michael BrushTop pros' top stocks for 2011 12/21/201010 hot stocks for a cold winter 12/14/2010Why food bills are heading higher 11/16/2010More . . .Fund data provided by Morningstar, Inc. © 2009. All rights reserved.StockScouter data provided by Gradient Analytics, Inc.Quotes supplied by Interactive Data.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.Msn.Video.createWidget('Gallery8Container', 'Gallery', 500, 230, {"configCsid": "MSNmoney", "configName": "gallery-money-article-site-wide"}, 'Gallery8'); 0Comments var initData = {"partnerId":"54bd59b2-6179-4753-ac3f-009a75d55388","jsUrl":null,"strings":{"lc_shw":"true","lc_dtf":"%M/dd/yyyy %h:mm tt","lc_dtf2":"ddd %h:mm tt","lc_gmt":"-5","lc_erg":"Comments are currently unavailable. Try again later.","lc_det":"Comments are unavailable on this page.","lc_pgf":"{0} of {1}","lc_1ach":"Comment","lc_ach":"Comments","lc_newm":"Newest","lc_oldm":"Oldest","lc_bestm":"Best","lc_worstm":"Worst","lc_mixedm":"Controversial","lc_prv":"Previous page","lc_nxt":"Next page","lc_pageNumTooltip":"Enter a page number, and then press the Enter key","lc_first":"First page","lc_last":"Last page","lc_rpl":"Reply","lc_rbs":"Report","lc_edt":"Edit","lc_del":"Delete","lc_pstthanks":"Thanks for posting to","lc_pstand":"{0} and {1}","lc_seemore":"See more . . . ","lc_seeless":"See less . . .","lc_rpttxt":"Thank you for reporting.","lc_msg2mod":"Send note to moderator . . .","lc_cc0":"Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates the","lc_cc1":"Code of Conduct","lc_cc2":"Please use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.","lc_cat":"Categories","lc_spa":"Spam","lc_che":"Child pornography or exploitation","lc_pro":"Profanity, vulgarity or obscenity","lc_cor":"Copyright infringement","lc_har":"Harassment or threat","lc_usrpic":"Inappropriate user picture","lc_oth":"Other","lc_abc":"Additional comments","lc_opt":"(optional)","lc_atl":"100 character limit","lc_rep":"Report","lc_1hourm":"1 hour ago","lc_1minm":"1 minute ago","lc_recomm":"You recommend this","lc_recomdontm":"You don\u0027t recommend this","lc_voted":"You have voted on this","lc_suicide":"Threats of suicide","lc_joi":"Be the first to comment","lc_shwm":"Show comments","lc_hidem":"Hide comments","lc_hourm":"{0} hours ago","lc_minm":"{0} minutes ago","lc_secm":"{0} seconds ago","lc_add":"Add a comment","lc_dmg":"Are you sure you want to delete this comment?","lc_dok":"Delete","lc_dca":"Cancel","lc_pna":"There\u0027s a problem creating posts right now. Please try again later.","lc_clt":"This discussion is closed. New comments cannot be posted.","lc_fta":"Be the first to comment","lc_fsg":"Be the first to add a comment. To add a comment, please","lc_sgn":"sign-in","lc_lnk":"Read comments","lc_spell_gen_err":"Could not check spelling. Please try again later.","lc_spell_no_mist":"No spelling errors found.","lc_spell_num_mist":"Spell check detected {0} mistake(s).","lc_spell_in_prog":"Spell check in progress...","lc_spell_check":"Check Spelling","lc_post_gen_err":"There's a problem creating posts right now. Please try again later.","lc_post_long":"Post cannot be longer than {0} characters.","lc_post_empty":"Your post cannot be empty.","lc_cmnt_day_max":"You already reached the daily limit for posts today. Please post again tomorrow.","lc_post_prog":"Post in progress...","lc_post":"Post","lc_save":"Save","lc_not_auth":"You are not signed in.","lc_no_suggest_paren":"(No suggestions)","lc_ignore_paren":"(Ignore)","lc_insrt_emot":"Insert Emoticon","lc_cancel":"Cancel","lc_ok":"OK","lc_fmt_quote":"Format as Quote","lc_incr_indnt":"Increase Indent","lc_decr_indnt":"Decrease Indent","lc_bullets":"Bullets","lc_numbering":"Numbering","lc_italic":"Italic (CTRL+I)","lc_bold":"Bold (CTRL+B)","lc_post_dirty":"Edits you have made to your post will be lost.","lc_rte":"Rich Text Editor","lc_ip_banned":"The computer or device you are using is temporarily banned from posting on this site. People or automated programs have recently used this computer or device to create unwanted posts. You may still browse the site and read other people's posts, but you can't create, edit, or delete posts.","lc_chk_msg_spell":"Check message for spelling errors (F7)","lc_post_msg":"Post this message (CTRL+ENTER)","lc_perm_ban":"This Windows Live ID was banned for violating the Code of Conduct. You may still read other people's posts, but you can't create, edit, or delete posts.","lc_temp_ban":"This Windows Live ID is banned from posting on this site until {0}. You may still read other people\u0027s posts, but you can\u0027t create, edit, or delete posts. ","lc_also_pst_fb":"Facebook","lc_also_pst_wl":"Windows Live","lc_also_post_to":"Also post to:","lc_idnt_settings_err":"Could not save your settings. Try again later.","lc_idnt_nick_prohibited":"The nickname you requested is not allowed. It may contain a reserved name or profanity. Please enter another nickname.","lc_idnt_nick_unavail":"The nickname you requested is not available. Please enter another nickname, or select one of these suggestions:","lc_idnt_nick_empty":"Nickname cannot be empty","lc_idnt_nick_max_len":"Nickname cannot be longer than {0} characters","lc_idnt_nick_allowed_chars_err":"You nickname may only contain letters, numbers, hyphens, underscores, and periods. Please enter another nickname.","lc_idnt_lnk_msn_wl":"Link your MSN posts to your profile on Windows Live","lc_idnt_posting_name":"Now when you post with your \u003cstrong\u003ename\u003c/strong\u003e, all of your past and future MSN posts link to your profile on \u003ca href=\"{0}\"\u003eWindows Live\u003c/a\u003e so your friends can read them.","lc_idnt_posting_nick":"If you keep posting with your \u003cstrong\u003enickname\u003c/strong\u003e, your posts aren't connected to your profile on Windows Live.","lc_idnt_name_nxt_psts":"The name you choose appears next to all of your past and future MSN posts.","lc_idnt_post_w_name":"Post with my name","lc_idnt_kp_post_w_nick":"Keep posting with my nickname","lc_idnt_chs_name":"Choose the name that appears next to your posts","lc_idnt_name_lnk_wl":"If you post using your name, your posts link to your profile on \u003ca href=\"{0}\"\u003eWindows Live\u003c/a\u003e so your friends can read them.","lc_idnt_nick_no_wl":"If you create a nickname, your posts are not publicly connected to your profile on Windows Live.","lc_idnt_post_w_nick":"Post with a nickname","lc_idnt_enter_nick":"Enter nickname","lc_idnt_post_w_yr_name":"Post with your name","lc_idnt_mst_use_name":"You must now use your name when you post here.","lc_idnt_note_post_w_name":"Note: When you post using your name, your posts link to your profile on \u003ca href=\"{0}\"\u003eWindows Live\u003c/a\u003e so your friends can read them.","lc_continue":"Continue","lc_idnt_create_nick":"Create a nickname","lc_idnt_nick_nxt_pst":"Your nickname appears next to your posts on MSN.","lc_idnt_nick_allowed_chars":"Nicknames may contain letters, numbers, hyphens, underscores, and periods.","lc_cmnt_unavail":"Commenting is currently not available. Try again later.","lc_loading":"Loading...","lc_signin":"Sign in","lc_signin_create":"Sign in with your Windows Live ID, or create a new one.","lc_spam_msg":"Your post was blocked because it appears similar to spam or automated messages. If this is not the case, revise your post and try again.","lc_wrt_cmnt":"Write a comment...","lc_avtr_pic":"User Picture","lc_edit_cmnt_err":"Could not load comment for editing. Try again later."},"isCommentShow":"true","_p":"","locale":"en-us","forumId":"00120065-0000-0000-0000-000000000000","forumTitle":"MSN Money","boardId":"00000065-02a6-0000-0000-000000000000","boardTitle":"ArticleComments","threadId":"fd6feda2-5091-4ae4-8bf3-b73eb30bcd9a","title":"Article Comment","userId":"b5e44170581cc833","contentId":"2tdndhxb6mb9kvfehc8gv6u098a4juxs","pageUrl":"http://articles.moneycentral.msn.com/Investing/MutualFunds/why-japanese-stocks-look-tempting.aspx","appUri":"http://social.msn.com/boards","cssBaseUrl":"http://blstc.msn.com/br/scp/css/15/","emoticonBaseUrl":"http://us.social.s-msn.com/s/","responseBridgeUrl":"http://articles.moneycentral.msn.com/scp.aspx","cmntSharingOn":true,"cmntSharingNetworks":[{"id":0,"locKey":"lc_fb","tooltipLocKey":"lc_also_pst_fb"},{"id":1,"locKey":"lc_wl","tooltipLocKey":"lc_also_pst_wl"}],"omniAccount":"MSNPORTALSCP","currentPage":1,"totalPages":0,"sortOrder":0,"isAuth":false,"signInUrl":"https://login.live.com/login.srf?wa=wsignin1.0&rpsnv=11&ct=1293616837&rver=5.5.4177.0&wp=LBI&wreply=http:%2F%2Farticles.moneycentral.msn.com%2FInvesting%2FMutualFunds%2Fwhy-japanese-stocks-look-tempting.aspx&lc=1033&id=250710","genericAvatarUrl":"http://us.social.s-msn.com/s/images/bluemann.png","settingsCookieDomain":"msn.com"}; scpjs.Comments.init(initData , false, true); /*MSN PrivacyLegalAdvertiseRSSHelpFeedbackSite mapAbout our ads© 2010 Microsoft/*So what exactly could go right for Japan? Let's take a look. A weakening Chinese yuan Because Japan's economy, like China's, is built on exports, growth in China will create demand for goods from Japanese companies, lifting Japanese stocks over the next year or two. There's an important twist that will make this play out: The Chinese yuan is going to rise in value against the yen.
A stronger yuan amps up Chinese demand for Japanese stuff because it gives Chinese consumers and companies extra buying power. China's emerging middle class wants the same consumer goodies that well-off people around the world want -- like the flat-screen TVs and cars that Japanese companies make so well.
Why will the yuan go up in value? First, China is under considerable pressure from the U.S. and other countries to stop artificially suppressing the value of its currency. That's been a deliberate tactic to help China's own exporters over the years. But it hurts domestic competitors in the U.S. and Europe, and those countries are complaining.
Second, Chinese politicians are now worried about inflation, which can spark civil unrest if it gets out of hand. A stronger yuan is a great weapon against domestic inflation, because it cools off foreign demand for Chinese goods. It makes Chinese goods look more expensive, and less desirable, to foreigners. So they buy less, which reduces upward pressure on prices for Chinese goods. Reasonable growth ahead Here's another thing that could go right for Japan: The country's economy may actually post at least a reasonable 2% annual growth over the next two years. Besides demand from China and other hot emerging markets in Asia, Fed actions to boost the U.S. economy will benefit Japan.
Now, 2% growth may not sound like much. But don't forget, it won't take much growth to boost Japanese stocks. One reason is that Japanese companies are lean after so many years of cost-cutting to cope with a strong yen, which hurt their sales abroad.
And, underneath all this, Japanese stocks are just really cheap because of years of neglect. That makes them a great contrarian play -- a bet that will pay off once the investing crowd changes its mind and takes an interest in Japan. "Most money managers are underweight Japan," says James Dailey, portfolio manager of the TEAM Asset Strategy Fund (TEAMX), which is placing bets on a rebound in stocks there. "You could get massive money flows in." Stealth China plays Oddly, the cheapness of Japanese stocks is a part of an optical illusion that's tricking investors into missing out on the opportunity. While many investors avoid Japanese companies because of problems in Japan, a lot of these companies are really China plays in disguise, because they export so much to China. The bottom line: That makes them a deceptively cheap way to play China growth.
To play a rebound in Japanese stocks, you can buy any of the mutual funds I mention in this column, because they all have exposure to the country. Or you can try your hand at individual companies. I asked the managers of these funds to suggest some of their favorite Japanese stocks buyable on U.S. exchanges.
Now, here's a roundup of the main reasons to buy Japanese stocks now, with the stocks to buy to play these reasons. Reason No. 1: Japanese stocks are unloved and cheap Contrarian investors like Warren Buffett beat the markets by venturing into disliked sectors. They know that in the ever-changing cycles of the market, out-of-favor areas become popular again sooner or later. The rush of money that comes in as the tide of investor opinion turns can produce great returns.
Japanese stocks fit the cheap-and-unloved bill now. Direct comparisons based on price and earnings are tough because of accounting differences in the U.S. and Japan, so let's look at this a different way. U.S. stocks are as cheap as they've been since the early 1950s right now, considering the low levels of inflation and interest rates, says Wells Capital Management strategist James Paulsen. Japanese stocks look even cheaper. Their relative value against U.S. stocks has fallen to its lowest level since the early 1950s, says JPMorgan Chase analyst Hajime Kitano. "We think both absolute and relative valuations are now attractive," he says.
Here's another measure that shows how cheap Japanese stocks are. Investors pay $1.80 for a dollar of corporate revenue in the stock markets of Brazil, Russia, India and China, those popular BRIC emerging-market economies. In the Japanese stock market, you pay just 60 cents for a dollar of corporate revenue, Hennessy says.
One example is Itochu (ITOCY, news, msgs). A conglomerate, Itochu gets a very big part of its revenue by selling metals and raw materials in high-growth countries like China. For raw materials, Itochu has similar costs as BHP Billiton (BHP, news, msgs), because it is a joint venture partner with that mining company. But it has a dramatically lower valuation, points out Ned Gray of the Delaware International Value Equity Fund (DEGIX), which owns Itochu. Besides selling raw materials to China, Itochu sells packaged food, textiles, chemicals and industrial components there. In short, it is a China play, but on the cheap.
Note that Itochu, like several of the stocks in this column, trades as a pink sheet stock in the U.S., not trading on a major exchange. While I normally advise extreme caution with such stocks, these are all well-established Japanese companies, so the normal concerns do not apply. This one is thinly traded, however, so buying enough shares to establish a position -- and selling down the road -- may require patience.
Continued: Stemming persistent deflation in JapanMore from MSN Money
1 | 2 | next >
Read Full Article »