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Carlos Salas is Fund Manager/ Sr. Equity Analyst with sector generalist experience to generate long/short ideas using Fundamental, Event Driven and Macro investment styles in global equities. He also is deeply involved with the CFA Institute UK educational initiative as co-chair of the CFA... More
  • Abenomics:Some Exporters Are Still Cheap 0 comments
    Oct 31, 2013 3:31 PM

    Some say Since the BoJ recently appointed chairman Haruhiko Kuroda announced its massive monetary initiative in early January adopting a target to achieve a 2% increase in consumer prices with open-ended asset purchases, lots of things have happened:

    Three-Arrow plan: Shinzo Abe's baptized with such flamboyant name his plan to revitalize its beleaguered economy through three sequential steps named aka as arrows:

    1. Monetary Arrow: the BoJ currently purchases government bonds with maturities of up to three years, as well as exchange-traded funds, real-estate investment trusts and other risk assets, through a fund targeted to reach 76 trillion yen (800 USD bn) by the end of 2013.
    2. Fiscal Arrow: The Abe administration decided to raise the consumption tax hike from 5% to 8% for April 2014 (10% in 2015). To counter this effect, the government is considering other economic packages such as 5 trillion JPY supplementary stimulus and another 1 trillion JPY in tax cuts. Economists expect 2H14 at the earliest when tax breaks for companies will start stimulating capital investment.
    3. Structural Arrow: Shinzo Abe has neither issued any clear guidance nor hint a determined course of action until the first two arrows proved to be successful.

    So far, so good for the economy: The new monetary and fiscal tone have given Japan a boost in the short run.

    • Economic Activity: The economy grew at a healthy annualized rate of 3.8% in 2Q13, following 4.1% in 1Q13. Other bellwether lagging monthly data such as Machinery orders also suggest supply activity is on the upside with leading indicators such as the Tankan confidence index reaching the highest level in six years.
    • Deflation no more: Consumer prices have recorded the fifth consecutive monthly increase in August (+0.9% vs 0.7% prior).
    • Fed Tapering Tailwind: Janet Yellen next role as Fed's Chairman has definitely convinced investor upon an extension of QE beyond Christmas.

    Fed Tapering effect are to be a blessing for Topix

    Source: BNP Paribas

    Nonetheless, we have several doubts concerning Japan chances to exit from its comatose status in spite of recent monetary and fiscal policy measures. In this way, the BoJ "nuclear" QE action is to double the monetary base as to target 2% in 2014, but beware:

    1. Japan's gross government debt-to-GDP ratio stands at 240% and Total Debt-to-GDP is an astronomical 450%.
    2. BoJ 2% inflation Target rate is unlikely to bring JBY yields back to 1990s (6-8%), unless we face a Japanese government default scenario due to its current Public Debt-to-GDP levels.
    3. Were Japanese JGB 5 Yr to be at 3%, interest payments in the short term will prove to be an unbearable burden surpassing the whole amount of taxes collected by the government.
    4. Demographics: the National Institute of Population and Social Security Research projects that Japan's working-age population will decline over the next 17 years, to 67.7 million people by 2030 from 81.7 million in 2010.
    5. Inflation so far driven by energy imports: consumer prices have been driven mainly by energy prices not salary increases and demand resurgence. In other words, consumption is to remain subdued in Japan until salary growth outpace inflation expectations. Abe's second arrow tries to tackle with this problem but so far it has only allocated 160 bn JPY in 2014 (1.6 Bn USD) to boost fixed capital investments that we think is insufficient.

    Therefore, Abe's third arrow proposals will be essential as to pose solutions to structural problems (demographics, immigration, energy policy, etc). Only then we could start talking about an internal demand recovery in Japan. At this stage, we only see one thing clearly: JPY bearishness is here to stay.

    Japanese Exporters Analysis:A Decade of Big JPY Declines

    (click to enlarge)

    ·Equity Screening: Play the game with cheap exporters

    We have screened companies with high sensitivity to JPY weakness based on a sample of members of the Topix Index with more than 800 Mill USD Market Capitalization, minimum 1.5 Mill USD average daily trading Volume and more than half of the revenues generated outside Japan.

    Moreover, we also calculated MSCI Japan Sector indices macro sensitivity with regards Tankan index quarterly changes. We back-tested monthly returns assuming a one-month investment horizon period and 5 days investment action delay for the period 2000-2013.The conclusion is that the stock picking decision should be a little bit biased towards consumer discretionary stocks.

    Tankan analysis suggests Consumer Discretionary exposure

    (click to enlarge)

    Source: Bloomberg

    Discretionary stocks maximizes winning probability

    (click to enlarge)

    Source: Bloomberg

    In addition, we have conducted further fundamental and bottom up research on the sample, leaving out those that are not fitting the bill due to extreme leverage, poor ROE or ROA, excessive valuation levels, unattractive niche specialization or economic value deterioration, among others factors. The list was then reduced to eleven candidates:

    (click to enlarge)

    Moreover, we conducted additional bottom up and forensic accounting analysis and decided to leave out some companies which core activities are currently challenged (Disco Corp focus on PCs), have heavy dependence on a single customer (Wacom's 40% sales come from Samsung) or lack of a clear link with Abe's first and second arrow (Nexon). The recommended equally-weighted basket is shown below:

    1. Nissan (7201 JP): Manufactures and markets automobiles, light trucks and its related parts. The company has overseas production bases in the US, Mexico and the UK.
    2. Fujitsu General (6755 JP): Manufactures air-conditioning units, refrigerators, purifiers and information-communication equipment as well as computer software and electronic devices.
    3. Bridgestone (5108 JP): Designs, produces and sells automobile tires worldwide besides sporting goods including golf equipment, tennis rackets and bicycles. Bridgestone announcement expansion of Vietnam plant investment
    4. Isuzu (7202 JP): Manufactures and markets trucks and automobile parts. The company products include pick-up trucks, light/heavy duty trucks, medium and large-sized buses and sport utility vehicles. One third of the revenues come from South East Asia while another third from Japan.
    5. Chiyoda (6366 JP): Constructs, inspects and maintains industrial plants around the world. Those plants include oil refinery, petrochemical, food and pharmaceutical plants. The company also provides comprehensive engineering services for such energy saving, factory automation (FA) and environmental preservation for water treatment and soil purification. We think the company will benefit especially from Abe's second arrow .


    An equally weighed-basket with Nissan, Fujitsu General, Bridgestone, Isuzu and Chiyoda is an attractive choice to begin a savvy exposure to"Abenomics" in a global equity portfolio. Results are pretty straightforward when running a simple historical analysis for the period 2000-2013:The basket outperforms the Topix around 14.5% on average every time JPY depreciates significantly with a winning ratio close to 80%. However, the basket underperformed by 2.5% on a weekly basis for periods where Topix weekly performance was below 2 standard deviation.

    • (click to enlarge)

    To sum up, this basket is a nice option to those wishing to play further JPY weakness to come in late 2013 and 2014 at reasonable valuation levels but beware it is not a free-lunch in terms of risk.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OTCPK:CHYCY, OTCPK:NSANY, OTCPK:BRDCY, OTCPK:ISUZF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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