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Chinese QDII Funds Should Be Ready for Japan

|Includes: FUND

Chinese QDII (Qualified Domestic Institutional Investor) fund may had forgotten their neighbor across the East China Sea. I am a little surprised that the investment in South Korea by Chinese QDII funds is about 4.5 times than that in Japan, especially considering the size of the second biggest economy over the world. Chinese managers should be noticed that things had changed, and Japan could be a wonderful investment destination and much undervalued market.

 

Chinese QDII Funds Regional Asset Allocation

Country

Mkt Value (NYSEARCA:CNY)

pct(%)

Numbers

Hong Kong

38,904,713,758

71.77

9

US

4,622,895,594

8.53

7

Australia

2,298,832,972

4.24

4

Korea

1,858,145,560

3.43

3

UK

1,688,937,821

3.12

4

India

1,381,119,769

2.55

2

Singapore

1,241,440,645

2.29

5

Indonesia

826,693,188

1.53

3

Japan

404,780,564

0.75

3

Thailand

397,547,061

0.73

1

France

218,817,595

0.40

3

Switzerland

137,385,538

0.25

3

Canada

99,747,008

0.18

3

Germany

49,776,975

0.09

3

Malaysia

25,735,252

0.05

1

Italy

16,677,025

0.03

1

Spain

8,277,562

0.02

2

Netherland

8,175,560

0.02

2

Brazil

6,330,107

0.01

2

Philippines

4,163,976

0.01

1

Mexico

3,937,094

0.01

1

Norway

3,157,279

0.01

2

Greece

115,501

0.00

1

 

I did believe the DPJ could lead Japan to change from the lost ten years. The Hatoyama administration had said export links with China and stimulus plans were vehicles to reach the coast. Japan’s position in Asia markets, as a high-end consumer good provider to growing economies such as China and India, or leader in climate change technology, will tell all of us that the Samurai is coming back.

 

Undervalued Market

 

Many leading money managers, such as Byron Wien, had said Japanese shares are his favorites recently.(See the Bloomberg Report Japan Price-to-Assets Makes for Cheapest Stocks.) From the perspective of middle or long term horizon, Japanese equities are very attractive because of their valuation comparing to other world markets and against its own history.

Now the Japan market is traded at low 20x P/E and at 20% premium to its book value, a 40-year low. The average dividend yield is 1.9% for Japanese equities, higher than 10-year Japanese government bonds.

 

Export to China

 

Investors may confuse with various surfaces of Japan economy. The country is bearing a history-level deflation but also showing high-level GDP per capita in last 20 years. Read More on A tale of two counties.

 

If Chinese QDII funds sail to Japan, the first thing for them is to pick out companies which will benefit from the growing Chinese consumption. Obviously, auto sector would be the best choice as China has become the world’s biggest auto market in 2009. Read More on Japan auto sector set to feed off China growth.

 

Actually it is a good approach which is similar with what Chinese investors had done in Australia. They bought natural resources and commodities companies, as China imported about half of iron ore, copper and other materials to match the high growth demand.

 

For instance, although the total sales of Toyota Motor Corporation (トヨタ自動車株式会社, TYO: 7203) was down to 7 million from 9 million, but in China, the sales was up 21%, to 710, 000. Honda Motor Company (本田技研工業株式会社, TYO: 7267)’s sales also climbed 23%, to around 580,000.

 

According to The Journal of Commerce Online, China had replaced U.S. as Japan’s top export market in 2009. I do suggest Chinese investors to notice this trend and take eyes on Japanese export stocks related to China, such as Hitachi Construction Machinery Co Ltd (日立建機, TYO: 6305) and Kubota Corporation (クボタ, TYO: 6326).

 

Retail and Clean Tech

 

This morning I got to know Japanese e-commerce company Rakuten (楽天株式会社, JASDAQ: 4755) took a step toward expanding outside its home market with a deal to with Chinese leading search engine Baidu.com on joint venture. Japanese retail companies have advantages in operation management and brand marketing, with the similar culture, so that they would lead the fashion trend in most of Asian countries just like they had done in Taiwan. MUJI, or Ryohin Keikaku Co. Ltd, (株式会社良品計画, TYO: 7453), had proved its success in mainland China by selling a life style to growing middle class Chinese.

 

Japan is a country which runs a big economy with low carbon emissions in the past years. According to a research by Harel-Hertz Investment House, I make a list on key sectors that Chinese investors should pay attentions to:

 

1.     Clean Energy

2.     Solar Power Generation

3.     Fuel Cells

4.     Waste Management

5.     Recycling

6.     Soil and Water

7.     Air Quality

 

Both above technologies would be applied in China and create a bigger market.

 



Disclosure: No positions