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To print article, click Print on your browser's File menu. Go back Posted 5/16/2003 |
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Forbes 9 bright stocks in Japan's gloom and doom All is not lost in the world's second-largest economy. Despite ongoing problems, there are real signs of hope. And some companies there are actually thriving. By Benjamin Fulford, Forbes Bleak and bleaker -- that has been the outlook for Japan for an achingly long time. Since its financial bubble burst a dozen years ago, several false recoveries have come and gone. The bulls talking about a bottom being hit have as much credibility with the general public as that Iraqi information minister.
Current conditions do not seem auspicious. Relentless deflation is eroding prices for goods and services at an annual rate of 1% to 5%, depending on whose data you believe. A 10-year Japanese government bond pays an interest rate that is just a smidgen more than nothing. Moody's downgraded Japan's credit rating from A1 to A2 last year; it is now lower than Botswana's. For the ultimate defensive play, cash in the mattress has been a safe investment. Thanks to deflation, holders of cash have seen the purchasing power of their money rise by 14% since 1991. Following the bubble's burst, the Japanese public has socked away an estimated $250 billion in cash. The collapse in Japan's equities far overshadows that, however. The Topix weighted index of all shares on the Tokyo Stock Exchange has fallen by 51% in the last three years and 25% in the last 12 months. Large swaths of corporate Japan are nearly bankrupt, even banks and life insurers. Still worse, the government and economic distress are forcing banks, insurers and large companies to divest their vast stock positions--and the $80 billion influx of these cross-shareholdings, between now and September, into the market threatens to sink it even more. Japan's banks alone have dumped $10 billion already, with $20 billion to go, says Goldman Sachs strategist Katherine Matsui. Small wonder that nine foreign securities firms, including Commerzbank, have left Japan during the past year. Gloom and doom = opportunity To a contrarian, all this gloom and skepticism is a sign you can make money from Japanese investments. Look at what's going on in real estate. The significant fact about this sector is that prices have fallen much further than rents. The result is that some Japanese properties yield annual rents as high as 10% of their purchase values. Even allowing a good measure of deductions for operating costs leaves a risk-tolerant landlord with a handsome return. Note that, with deflation under way and with long bonds yielding next to nothing, mortgages can be had at interest rates below 1%. This is not a sector suitable for amateurs, since commercial properties are often linked to gangsters. But the disparity between mortgage rates and rental returns suggests that real estate's decade-long recession will soon be over. When that market turns, other assets -- notably, stocks -- should see less selling pressure, too. What are the prospects for the stock market? Once the cross-shareholding sell-off subsides, probably this fall, some real appreciation should occur in several key areas. The cross-ownership has kept many Japanese companies buyout-proof; this will no longer be the case. The changes mean that institutional investors, many of them foreigners, are taking over from banks as the main stakeholders in corporate Japan. They are asking for -- and getting -- improvements in accounting, management and profitability. More good news is that the Bank of Japan, the nation's Federal Reserve, has started to buy equities to help the market. Market caps are really, really low Meanwhile, great bargains are to be had. An amazing 60% of Japanese listed companies have a market capitalization that is lower than the value of their assets. Another positive note that few have spotted is that much-needed restructuring has occurred among Japanese companies; at the same time, exports over the past year are up 37%. Result: Profits for listed companies (excluding financial concerns like banks) rose 80% in the fiscal year that ended Mar. 31, according to Morgan Stanley's estimates. Here are three ways to play Japanese equities, with stocks that are off their 52-week highs, many of them available as American Depositary Receipts (see table below): Blue chips. Much of the unwinding of cross-holdings is of truly blue-chip companies, like Toyota Toyota, for instance, last year earned $12 billion, with 80% of it from the United States And this at a time when the Big Three are dragging. Under the circumstances, Toyota's $84 billion market cap, despite being larger than those of DaimlerChrysler Deflation plays. Some domestic companies benefit from the ongoing price declines. Derek Jaskulski, manager of the Portland Global Fund (no ticker), has bought shares in two Japanese grocery chains, Aeon Another example of a sector that gains from deflation is home-improvement stores. Their sales rose 28% from 1999 to 2002, presumably because homeowners who cannot sell into a very weak market choose to fix up their houses instead. A standout in this category is Sekichu The winners in a deflationary environment can do very well. There are at least 20 companies that have seen their share prices more than double from 2000 to 2002, says Robert Feldman, chief economist at Morgan Stanley in Japan. The grand prize goes to Takara Death of the zombies. This one is for the more risk-oriented. In this scenario rising public debt will eventually force up interest rates. These increased interest costs will finally purge the losers from sectors like construction and retailing, and thus create huge growth opportunities for the survivors. Thus construction companies like Hazama
*Trades as ADR. NM: Not meaningful. Source: Worldscope via FactSet Research Systems. |
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