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Published: August 8, 2009
Investors who pay attention to Japan’s looming election can
expect to be well-rewarded for their time.
Normally, we confess, Japanese elections don’t matter much,
because the same guys always win. However, this one – set for
Aug. 30 – looks different: It may actually bring about the first
real change in Japan’s government in 55 years. That’s important.
The opposition has different ideas about what the Japanese
economy looks like. That means you should be buying different
Japanese stocks, not the well-known names.
The Liberal Democratic party (LDP), in power since 1954 except
for 11 months in the 1990s, hasn’t done a bad job. After all,
Japan is hugely richer than in 1954. However, after a successful
period in 2001-06, the country has had three prime ministers in
three years. The current leader, Taro Aso, believes in heavy
government spending, particularly on infrastructure. That
reflects the party’s traditions, which have favored exporting
companies and the construction sector. Those traditions and
priorities have also made Japan’s public debt 180% of gross
domestic product (GDP).
The opposition Democratic Party of Japan includes the
Socialists, and favors higher social spending. However, it also
wants to encourage domestic consumption, and to kill the big
construction projects on which the LDP has spent so much.
Economically, the Democratic Party’s platform makes sense,
certainly given its shift in emphasis away from the programs
focused on in the last few years. Politically, voters are tired
of the LDP and badly want a change. Hence the DPJ is likely to
win a majority in next month’s election.
That probable victory has major implications for investors.
* For starters, let’s consider the big exporting companies. Such
players as Panasonic Corp. (NYSE ADR: PC), Sony Corp. (NYSE ADR:
SNE) and Hitachi Ltd. (NYSE ADR: HIT) – may become less
prominent, as they won’t have such strong backing from the
government bureaucracy. The construction companies – Komatsu
Ltd. (OTC ADR: KMTUY), Kajima Corp. (OTC ADR: KAJMY),
Sumitomo
Realty & Development Co. Ltd. (OTC: SURDY) and the like – will
do less well.
* On the other hand, domestic-oriented companies, particularly
in consumer products, should benefit. Low-end consumers may do
better than high-end, so we’ll look for basic goods.
The Japanese market is still down more than 75% from its 1990
high, although it has rebounded about 30% from its March lows.
Japan had a bad recession: The Economist expects 2009 GDP
to be 6.1% below 2008. Nevertheless, the economy looks poised
for recovery. If that happens, the market will do well, and
consumer-oriented stocks will do especially well.
Many
Price/Earnings (P/E) ratios look high – as is common in
Japan – but Japanese accounting is conservative and a real
economic recovery could bring rapid earnings growth. Still, in
searching for the most-promising profit plays, I will look for
P/Es of 20 to 22, or less, to keep values reasonable.
How to buy them: Most Japanese companies these days trade as
American Depository Receipts (ADRs), that trade only on the
“Pink Sheets.” Those are not very liquid in New York. However,
some brokers – such as E-Trade – now allow you to
trade directly on the Tokyo stock exchange. So I’ll give you
both the Tokyo symbol and the OTC ADR symbol, and you can choose
which way to go.
Here are the seven ways to play Japan’s election (with one bonus
pick for good measure):
* Kao Corp. (4452; OTC ADR: KCRPY) is a classic
consumer-products company – kind of like a Japanese version of
The Procter & Gamble Co. (NYSE: PG) here in the United States.
Kao produces cosmetics, laundry and cleaning products, making it
a domestically oriented company that should do well as Japan’s
consumer spending improves. Stock stats: The
company’s stock trades at 17 times earnings and yields 2.7%.
* Kirin Holdings Co. Ltd. (2503; OTC ADR: KNBWY) produces
beer, soft drinks, food products, whiskey and pharmaceuticals.
In addition to its strong position in Japan, Kirin is a major
player in the East Asian market. Stock stats: P/E
ratio 16; stock yields 1.6%.
* Circle K Sunkus Co. Ltd. (3337; PINK: CLKSY) is a
nationwide convenience store chain that sells food, beverages
and gaming software. Stock stats: P/E ratio 13;
dividend yield 2.7%.
* QP Corp. (2809; OTC ADR: QPCPY) produces mayonnaise,
salad dressing, egg products and health foods. Stock stats:
P/E ratio 17; dividend yield 1.5%.
* Showa Sangyo Co. Ltd. (2004; OTC ADR: SHSGY) produces
and sells flour, cooking oils and confectionary products.
Stock stats: P/E ratio 19; dividend yield 2.4%
* Seven and I Holdings Co. Ltd. (3382; PINK ADR: SVNDY)
is a merger of Ito-Yokado, 7-11 Japan and Denny’s Japan. It
operates convenience stores, food stores and fast food
restaurants. Stock stats: P/E ratio 22; dividend
yield 2.5%.
* Eisai Co. Ltd. (4523; OTC ADR: ESALY) produces and
sells prescription drugs and medical equipment in Japan and
overseas. Stock stats: P/E ratio 19; dividend
yield 4.2%.
Check the companies carefully before investing (most have Web
sites), but the above are some suggestions of companies in
interesting sectors that appear solid and not overpriced. If you
don’t feel confident about investing directly in Japan, you
could also consider investing in the largest Japan-focused
exchange-traded fund (ETF), iShares MSCI Japan index (NYSE:
EWJ). The EWJ ETF currently has a P/E ratio of 15.
-- Martin Hutchinson
Contributing Editor
Money Morning
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