Great Investment Bargains in Japan - How to participate in the coming boom
Stock-Markets / Japanese Stock Market Mar 27, 2007 - 10:41 AM
While China is indeed growing like a weed, many of its Asian neighbors are growing almost as rapidly. What's more, the stocks in some of these other countries are trading at lower valuations.
Since I was born with the cheapskate gene, I just love bargains. So today I want to tell you about Japan, a great place to find some of Asia's greatest value stocks.
Let's start with three facts:
Fact #1: Japan boasts the second-largest economy and stock market in the world.
China may have the sexier growth story, but Japan is far bigger in terms of current stature. In fact, the total value of the Japanese stock market is five times the size of China's market.
Fact #2: Japan is poised to benefit from the growth of its Asian neighbors, including China.
Japan has long been a heavy exporter, and China is eager to tap into Japan's technical expertise in areas like auto manufacturing, industrial machinery, and construction. As a result, Japan is now China's largest trading partner. And it's one of the few countries in the world that has a trade surplus with China.
Fact #3: Japanese stock prices are still 60% below their 1989 peak.
It's hard to believe, but 17 years after the Japanese market hit all-time highs, the country's stocks are still trading at a fraction of those levels. In fact, with a price-to-cash-earnings ratio of 8.5 and a price-to-book ratio of 1.9, Japan is the least expensive major equity market in the world.
Bottom line: Japan is an important force in the world … its economy is benefiting from the strength of its Asian neighbors … and yet its stocks remain cheap by historical and relative measures.
On top of that …
The Japanese Economy Is Strengthening From Within
Japan has transformed itself into a leaner, more efficient, and more profitable economy. It took years of painful restructuring, long-overdue layoffs, the trimming of unprofitable business lines, and debt reduction but it's starting to pay off.
After a 17-year wait, the Japanese economy is ready to roar along with the rest of its neighboring Asian tigers. One sign: Strengthening real estate.
Japan has been one of the very few parts of the world where real estate prices haven't been on fire. Nationwide, commercial and residential prices are still half of what they were in 1991.
But, according to the country's Ministry of Land, Infrastructure and Transport:
- In 2006, Japanese land prices rose for the first time in 16 years. The average price for commercial land in Japan's three largest cities rose 8.9%, while residential land prices grew 2.8%.
- Tokyo office vacancies fell to 2.87% in January, the lowest monthly level in at least six years.
- Real estate companies were gaining favor with investors, too. Last year, Mitsubishi Estate and Mitsui Fudosan rose 50% and 31%, respectively. And the Tokyo Stock Exchange REIT Index has gained about 40% in the last six months.
This renewed activity is spilling over into other areas, too. According to just-released statistics from the Bank of Japan, the value of financial assets held by Japanese households at the end of December hit a record 1.541 quadrillion yen (US$13.053 trillion).
It seems as though the Japanese are finally gaining confidence in their country's prospects. They're starting to pull their money out of the bank and from under their mattresses, and invest it in stocks and bonds — the balance of cash and bank deposits held by Japanese households declined by 0.5% from a year earlier.
You can't blame Japanese investors for being gun-shy … 17 years of waiting is long enough to strain anybody's patience. But if the country's conservative households are leaving the banks and shifting their money into other assets, it may be the time for foreigners to do the same.
How to Participate in the Resurgence of Japan
In my book, the best way to invest in Japan is by picking out the individual companies that are already seeing exploding revenues and profits. Then, I take a look at their share prices to make sure they still represent good values.
However, for a more diversified approach to Japan's stocks, Americans can choose from seven different exchange-traded funds.
Investors interested in the big-name, large-cap issues should check out the SPDR Russell/Nomura Prime Japan (JPP) , and the iShares S&P/TOPIX 150 (ITF) .The iShares MSCI Japan Index Fund (EWJ) also mainly holds large-cap stocks, though it has some smaller companies thrown in for good measure.
For a fund with a greater focus on small- and mid-cap companies, look to the SPDR Russell/Nomura Small Cap Japan (JSC) .
If you're specifically interested in stocks that pay dividends, there are three different ETFs being offered by WisdomTree that fit the bill — the Japan Total Dividend Index Fund (DXJ) , the Japan High-Yielding Equity Fund (DNL) , and the Japan SmallCap Dividend Index Fund (DFJ) .
Remember, there's a lot more to Asian investing than just China. So if you're looking for a low-valuation way to participate in the economic miracle unfolding overseas, keep Japan in mind. I think you'll really like what you see.
Best wishes,
Tony SagamiP.S. If you're interested in hearing more about my favorite undervalued Asian stocks, subscribe to my Asia Stock Alert service.
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