Bargain Hunting for Japanese Stocks

The following was taken from the transcript of this week's TFN Smart Trading video featuring Martin Hutchinson:

Laura Cadden: Traders and investors have been turning a concerned eye towards Japan. Housing sales in the Land of the Rising Sun crashed in 2007 and despite a long overdue increase in GDP growth last year, many believe that the country, once again, is at the edge of, or already in, a recession. Japanese business confidence is plummeting amid fears that the rising Yen will damage its crucial exports trade. The Nikkei has experienced its worst drop since 2001. Is it time for investors and traders to move their assets out of Japan? I’ve invited Martin Hutchinson of The Money Map Report to provide some insight.

So Martin, reading your analyses of late, you're actually quite bullish on Japan.

Martin Hutchinson: Yes, I think the drop that we've had in the Japanese share market is because Japanese traders look at the world very differently to American traders. For example, when we had all the trouble last August the American markets went up seven or eight percent afterwards. It was crazy. You had sub-prime mortgages disappearing everywhere and the markets going up. Whereas Japan seems to have assumed that the American sub-prime mortgage industry is a big problem for Japan and therefore, their market's down about 30%. I mean they're everything in Japan because they've had such a lousy 15 years. Everything in Japan looks like a problem, everything in the U.S. looks like a bonanza. It's madness. So you have to take that into account when you're investing.

Laura Cadden: But yet, you feel that the economy is not in such dire straits?

Martin Hutchinson: Their growth rate's a good deal better than the U.S. one. They're running at about three-and-a-half percent at the moment and of course, they've got no population growth so that is a real three-and-a-half percent. The U.S has 0.6% growth in the last quarter and 1% population growth. In my book, that’s a recession. It's minus .4% after population growth. So the Japanese are really pretty solid. The housing thing last year – it was a very nasty crash – but basically what they did was they changed the way of getting permission to build new houses and it took everybody about six months to work out how the new system worked. It was a god-awful bureaucratic mess. And so of course, meanwhile, no houses were constructed. But that wasn't a real economic downturn, that was just bureaucracy gone mad.

Laura Cadden: Let's discuss what the impact will be if there is a U.S. recession. A great part of Japan's demand comes from U.S. consumers, correct?

Martin Hutchinson: Well, yes, but less than there used to be. China and Asia as whole is now a big part of their export market. Probably a more important problem for them is the Yen having zoomed up. It's gone from 120 to the dollar to a peak somewhere in the high 90s. It could even go higher, I think. And that obviously makes it more difficult for them to export. But equally, because Japanese consumers haven’t spent so much as Americans, there's a huge domestic market there that can absorb quite a lot of the growth. So you may want to look at companies that are involved in domestic Japanese business rather than purely its exports.

Laura Cadden: Now do you think that their economy is actually going to see an upswing any time soon?

Martin Hutchinson: Well, I think their economy's going to continue growing pretty nicely and I think their stock market will eventually come out of its current funk and realize that however bad the problems are in the U.S., Japan's on a different cycle. There isn't a housing crash in Japan because they had one 15 years ago. And I think there's every chance that the Japanese market may go down when everybody else goes down because traders are feeling suicidal for a month or two but when there's some kind of recovery in the West, Japan will lead it and will give a much bigger upsurge.

Laura Cadden: Do you think it's time for investors and traders to move in and snatch up bargains?

Martin Hutchinson: Yes, I think it's a pretty good time. You can satisfy yourself with the idea that the market is now at about one-third of its level in 1990 and 1990 is a long time ago. And it's down about 30% from its peak. I think you could easily find some bargains now in Japan.

Laura Cadden: What are you suggesting your readers look into?

Martin Hutchinson: I think there are three things that you can do. One is look at domestic Japanese companies. And the way you buy those is through the Japan Smaller Companies ETF (JSC) and that's basically looking at the smaller companies that are dealing the domestic market. They're less effected by the Yen going crazy or the U.S. having a recession.

And then for the second one, I think there's some very interesting technology companies in Japan, some of which are very well-known. But one that I'm very fond of, because it's quite cheap at about 11 times earnings, is an outfit called Omron (OMRNY.PK). This company is the world-leader in fuzzy logic control systems. And fuzzy logic is a sort of wonderful alternative mathematics that basically enables you to have more efficient vacuum cleaners and cement plants and things like that. They didn't have Descartes and Aristotle in Japan and so they understand fuzzy logic in a way that don't. And so here you've got this company that's a world-leader in this bizarre alternative technology and it makes very nice money and it's quite cheap.

And then the third thing, if you really want to be fashionable, is to go for Konami (KNM) and that's the video game producer. It's about to come out with Metal Gear Solid IV in two months and my expert, whose near 16 years this month, tells me that Konami's the best company in the business and frankly, with the sales of the Sony (SNE) Playstation and the Nintendo (NTDOY.PK) Wii, and even the X-Box (MSFT), all booming in the last year or so, you want to be in the guys that make the video titles for them and that's Konami.

Comments

[User 117413]

Hahaha!!! KNM is a great company and MGS_IV will be a hit nonetheless it will be an EXCLUSIVE to SNE so buying KNM shares because of the big Wii and XBox installed user base is laughable as no copy of that game will ever be played on such systems!

[kurt walter]

I have been reading about Japanese bargain stocks for years now. Yet, the stock market has been a dog for 20 years.

[dieuwer]

I think the Nikkei will plunge another 50% or so in real terms before we hit a multi-decade bottom. However, I think this will happen sooner, rather than later:
The Nikkei has been in a bear market for almost twenty year now and if my memory is correct, not one single stockmarket on the planet experiences a bear market of more than 20 years.
When the Japanese realize that a strong Yen is actually a good thing, provided it comes with productivity increases, the market will hit bottom and embarks on a multi-decade bull market.