How to ride on the Japanese market recovery (EWJ) (DFJ)

Alexander Green
0 Comments|October 25, 2013

A few months ago, I opined that Japanese stocks are among the most compelling investments worldwide.

Sure enough, since its June low the market there is up 18%. Yet I feel even stronger about Japanese equities now than I did then. Here’s why…

In 1989, the Nikkei 225 – Japan’s equivalent of the S&P 500 – hit a new all-time high near 40,000. Today, more than 20 years later, it languishes near 14,000, roughly 65% lower.

In other words, the Japanese market would have to almost triple just to get back where it was in 1989.

It wouldn’t surprise me if it did just that by the end of the decade. After all, it’s happened before. In the 1970s, the U.S. market returned just 0.34% a year for a 3.4% total return for the decade. The Japanese market compounded at 16%, generating a 10-year return of 344%.

Improving Politics

Last year, after more than 50 years as outsiders, Japan’s opposition party trounced the Liberal Democratic Party in a landslide. The new government is shrinking the country’s massive bureaucracy and cutting wasteful public spending. It is also cutting taxes and focusing on small and mid-sized businesses.

Of course, we’re all skeptical of politicians’ promises, but there is real change afoot there. New laws are generating labor market flexibility and greater participation in free-trade agreements. The Bank of Japan is in the midst of a massive monetary easing program. Japan reported 3.8% annualized growth in the April-June period. And, according to the Tokyo Stock Exchange, foreign investors poured a net $8.18 billion into Japanese stocks in September.

When the Japanese market began a strong run last November, there were indications that it was the hot money – short-term traders – pouring in. But a decisive parliamentary election in July is giving long-term investors confidence that Prime Minister Shinzo Abe will stay in power long enough to carry out difficult structural changes to the economy.

Long-Term Money

So long-term growth fund managers – as well as hedge hogs – are piling in. One reason is the weaker yen, down 12% against the dollar this year.

This acts like rocket fuel for exports. Why? Because a weak currency makes products cheaper in foreign markets, giving Japanese manufacturers an edge over the competition.

How do you play this development?

There are dozens of worthwhile Japanese ADRs trading on Nasdaq and the Big Board. In our short-term trading services, we have made good money this year trading companies like Nidec Corp. (NYSE: NJ, Stock Forum), Sony Corp. (NYSE: SNE, Stock Forum) and Nissan Motor Co. (Nasdaq: NSANY, Stock Forum).

And Toyota Motor Corp. (NYSE: TM, Stock Forum), a recommendation in our Oxford Trading Portfolio, is up more than 60 points since we got in last year.

If you prefer to hunt with a shotgun rather than a rifle, you can capture the performance of Japanese large-cap stocks with the iShares MSCI Japan Index (NYE: EWJ, Stock Forum) and the best of the small-cap sector with the Wisdom Tree Japan SmallCap Dividend Fund (NYSE: DFJ, Stock Forum). Better still, spread your bets and own both.

The important thing is to recognize that the Japanese market is on the road to recovery and in a pronounced uptrend. Are you taking advantage of it?

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THE MONEYBALL OF SMALL-CAP STOCKS
Danny Deadlock knows how to play small-ball, scouring the markets for junior companies that are cash-rich, debt-free, with a high upside but, somehow, have yet to be spotted by the mainstream.
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Tags: ETF

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