Two Stocks Perfect for Japan Demographics Crisis Anti-Trend Play
Companies / Japanese Stock Market Jan 01, 2015 - 12:04 PM GMTBy: Money_Morning
Keith Fitz-Gerald writes: The really great thing about following our “Unstoppable Global Trends” is that there are many ways to invest in each of them. The possibilities are endless, as is the profit potential.
Take Demographics, for example.
We’ve talked a lot about what’s happening in Japan right now and the conditions there that make it the perfect “Anti-Trend” investment. Between the crushing debt, the aging population, the lack of a workable immigration policy, and decades of abysmal fiscal policy working against it, the country is in trouble – thus my recommendation to short the currency via ProShares UltraShort Yen (NYSEArca:YCS).
It’s returned more than 116% since the Japanese yen was at 76 to the dollar when I initially recommended it to paid subscribers. And it’s returned another 5% since November 26 when I brought it to your attention. Now it’s set for another leg up.
But it’s far from the only way to play Japan at the moment.
Here’s What I’m Seeing on the Ground in Japan
I’m writing this from Tokyo, and let me tell you that the reality of what I see on the ground here is very different from what you see in the mainstream media back at home. I say that because, contrary to what most ivory tower pundits and legions of investors who have never spent any time here think, Japan is unlikely to enjoy the broad-based recovery that we’ve seen in the U.S. Most Japanese stocks, in fact, are going to fall flat.
But a select group is going to pop – especially the two I’m about to show you.
Today we’re going to talk about how you can find them… by making more complex connections nobody else has spotted yet.
That’s part of what I’ve found here in Tokyo.
Abenomics – that’s what the Japanese call Prime Minister Shinzo Abe’s economic stimulus program – is largely a bust so far. The self-reinforcing cycle of higher wages, higher prices, and higher consumption that’s the stated goal just isn’t happening – at least not in any broad or meaningful sense.
Anecdotally, the evidence is all around me.
For instance, I just stuffed myself silly at a local sushi restaurant last night, and the bill came to just $10. Breakfast was only about $5. My hotel, the Tokyu Stay, is a reasonable $125 or so a night. And this is in Tokyo – a city that was known as being one of the world’s most expensive to live in.
I spotted Apple’s new iPhone 6 on sale for ¥75,800, or roughly $642. The same model sells for $749 in the Apple Store. Or approximately $790 in Singapore, $870 in Germany, and $900 in Italy if you convert the respective currencies back to the U.S. dollar according to a MarketWatch story I saw recently.
If this keeps up, I can envision a day when Americans go to Japan to shop, just like the Japanese used to come here, just because it’s cheaper. It wasn’t that long ago when the Europeans came to New York for the same reason.
People I’ve talked with on this trip give the economic stagnation I’m sharing with you some context via their personal stories. For example, 72-year-old Hiroshi told me over dinner that he’s seeing prices going up and is getting left behind on his small teacher’s pension. Hiroko, a 25-year-old office worker, chimed in with her own story when she heard our conversation. Her living arrangements, she said, are getting more expensive, and she’s really having to struggle to make ends meet. Meanwhile, Kento, a 30-something salary man, echoed sentiments more commonly voiced in the United States: namely that the rich are getting richer while the politicians do nothing for the average citizen.
To be fair, Abe has no choice. He has to try. Something… anything to break Japan free and regain a semblance of the prosperity it once knew.
Hence Abenomics. It’s comprised of fiscal stimulus, structural reform, and monetary easing that are euphemistically called “the three arrows” by the Japanese.
For Americans who are keenly aware of the 128% rally in the S&P 500 since March 2009 that was prompted by similar Fed actions, this seems like an opportunity too good to pass up. So, millions of unsuspecting investors have bought in.
On the surface, this line of thinking makes sense.
Japanese companies are sitting on cash equivalent to roughly 60% of GDP, the government is threatening to tax retained earnings, and there’s a shrinking labor pool, so talented people are hard to find. Simply put, these should be ideal conditions for growth.
But remember, we’re talking about an anti-trend here.
Japan Is Not Healthy, Fiscally or Demographically
Japan’s demographic challenges mean its economy is destined to slide inexorably in the coming months and years. There’s nothing Abe can do about Japan’s dire demographical situation. And there’s very little he can do to stimulate domestic consumption.
But he can delay the full brunt of the pain. And he’s already doing it – through his own version of stimulus and weakening of the Japanese yen to boost exports in a frantic bid to put a floor over Japan’s collapse.
Yet, Abe’s policies are yet another attempt in a long line of efforts to shake off decades of moribund economic development. They change nothing. The average Japanese is getting pinched the way the middle class has gotten pinched in the United States and in Europe.
The recent election he won by a “landslide,” and which the Western press is reporting as such a clear-cut mandate, actually had the lowest participation on record, with just 52.4% of voters casting ballots. The Liberal Democratic Party that Abe ostensibly leads actually lost seats. I think it could have been even worse if not for the fact that disillusioned voters had nowhere else to go.
Abe’s plans, like Fed Chair Janet Yellen’s undertakings, are all largely “window dressing” for the bankers and politicos.
The economy slipped into a recession when the consumption tax was increased from 5% to 8% last April, and Japan’s gross domestic product for the July-September quarter dropped at an annualized rate of 1.9%.
That’s important because what it tells you is that Japan is really not all that fiscally healthy. In reality, the country is wound so tight that a mere 3% increase in consumption taxes pushed the economy backwards.
Which totally reinforces what my newfound friends are telling me – the average consumer is still under tremendous pressure. Until that changes, there’s no way to get around Japan’s economic woes.
However you feel about that personally, this Anti-Trend spells “investing opportunity.”
Which Stocks Will Benefit Most?
Our own experience and that of other nations under similar circumstances at the beginning of the last century shows that the path is very clear. What you want to do is concentrate on where the money is moving – and that’s right to the top of the heap.
In other words, you want to look for Japanese companies that have some cushion built in, have globally recognized brands, and are going to have a huge currency tailwind when they convert earnings based on the weaker yen that Abenomics requires.
The reasoning is pretty simple.
- First, small companies are priced at a premium in Japan right now which suggests they’re already too expensive to produce any real upside. Larger mega-caps are the better way to go.
- Second, Japanese-only companies are limited in what they can pursue. That’s because even with Abenomics, the domestic market is limited (and getting smaller). So you want to make sure you have companies with global reach because those are the ones that are going to grow when Abenomics ultimately fails.
- And, third, Japanese companies with global brands offer you recognition and strength in markets well outside Japan. Not only does this add diversity that’s good for your overall portfolio, but global brands can receive a real tailwind when they repatriate earnings because the yen that’s been diminished by Abenomics makes them uber-competitive in global markets.
My Two Favorite Examples Right Now
First, Toyota Motor Corp. (NYSE:TM).
Toyota offers a super mix of value and potential. Its forward PE is only 11.07, and its price-to-sales ratio is 0.92. Both numbers suggest that the stock is priced at a bargain. I also like the fact that its beta is 0.76, because that suggests it will be far less volatile than the broader markets.
And investors who buy Toyota shares now are getting in at an exciting time when the company is seeing some superb growth. Toyota’s new hydrogen fuel cell car is being called futuristic and freaky – but a zero-emissions car that also needs to spend only minutes refueling rather than hours recharging could send the stock to high heavens as it grabs a larger market share of the emerging green car market.
Like Tesla, the main problem for Toyota’s zero-emissions car is its cost, currently at $57,000 USD. In California where it will be rolled out in 2015, federal and state subsidies bring this down to $44,000. Despite the hefty cost, it’s quite conceivable that this rollout precedes a Tesla-like stock surge, and we can expect it to continue to benefit Toyota in the years ahead as the technology refines itself.
And with 40% of its production of cars taking place in Japan, Toyota stands to benefit immensely from the falling yen. Combine that fact with the company’s projected net revenues for 2015 being raised to ¥26.5 trillion – a 3.1% increase from 2014′s numbers despite the recession – and the situation for Toyota starts to look downright rosy.
Second, Kyocera Corp. (NYSE:KYO).
Kyocera manufactures, sells, and distributes a blend of industrial components, energy, telecommunications, and information services equipment. The company has been on a roll in the energy sector lately, receiving Japan’s 2014 Environment Minister Award for the fifth year in a row, in recognition of its increasingly energy-efficient manufacturing plants. It’s the latest in a flurry of environmental accolades that also includes Germany’s prestigious Blue Angel Award. The great press is a key reason that KYO was chosen to partner with Century Tokyo Leasing Corp. to build and operate the world’s largest floating solar power plant on the Yamakura Dam.
With this initiative and expertise, it’s not surprising to see that KYO increased its profits by 5.9% in the six months ending on September 30, 2014, even as the Japanese economy as a whole slipped into recession. As stimulus from Abenomics boosts the Japanese markets, companies like KYO will be the biggest beneficiaries.
The company trades at a forward PE of 22.80 and its price-to-sales ratio is 1.41. The dividend yield is a respectable 1.70%. The PEG ratio is a low 0.95, so you’re getting good value. Like Toyota, Kyocera tends to be a stable company, although its beta is a bit higher at 0.83, but still low enough to catch my attention as a portfolio stabilizer.
I’ll be back in a few days with a look at the two trends that will truly assert themselves in 2015.
Best regards until then,
Keith
Source : http://totalwealthresearch.com/2014/12/two-stocks-perfect-anti-trend-play/
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