Japan’s property developers have been battered by the March earthquake and tsunami, leading to opportunities for investors to pick up quality names at a low price.
— Yiannis Mostrous, Global Investment Strategist
The world seems to be divided into three separate economies: emerging markets with strong growth (e.g., China, Taiwan, India, Indonesia), developed markets with slow growth (e.g., United States, Canada, Germany, Australia), and semi-developed markets in recession (e.g., Greece, Ireland, Portugal). Then there is Japan, which is in a permanent nightmare world of its own. Last week, Japan released its first-quarter GDP report and it was much worse than expected, down an annualized 3.7%. This decline is on top of the 3.0% annualized decline in the fourth quarter of 2010, which officially puts Japan back into recession. The March earthquake and tsunami virtually assured that the Japanese economy would contract, but the extent of the contraction is “shocking” according to Toshiro Muto, a former deputy governor of the Bank of Japan.
The Japanese government under Prime Minister Naoto Kan enacted $49 billion in economic stimulus spending earlier this month, but it’s not enough and more fiscal spending will be needed. The problem is that Japan’s public debt is already enormous at 228% of the country’s GDP, so adding to this debt burden may be difficult to finance. The Bank of Japan has done its part to spur growth by offering $366 billion in low-interest loans to commercial banks and engaging in $122 billion of quantitative easing by purchasing long-term government bonds.
Preliminary data for April suggests that the current second quarter won’t be much better: exports fell 12.7 percent in the first 20 days of April. Economists expect the Japanese economy to contract an additional 3.3% annualized in the second quarter, but then to rebound in the second half of 2011. Warren Buffett has labeled Japanese stocks a “buying opportunity.” Since the stock market moves up in anticipation of an economic recovery, I thought I would offer up some Japanese-related stocks that may be good buys right now:
1. Toyota Motor (NYSE: TM)
Although the world’s largest automaker recently reported that its fourth-quarter net income fell 77%, its full-year profits of $4.7 billion were almost double last year’s tally, which is very impressive. Furthermore, the company announced that its production levels were recovering faster than expected from the March earthquake and were now expected to be 70% of pre-earthquake levels by June instead of its earlier April 22nd estimate of 50%. Rumors have been floating that production might actually get back up to 90% by June, but Toyota officials deny this.
The company has more than $43 billion in cash and trades at a low valuation of 11 times forward earnings and 0.5 times sales. If the world economy continues to grow, Toyota should benefit from the same strengthening consumer demand that I discussed in my article Ford Motor is Hitting on All Cylinders.
2. NTT DoCoMo (NYSE: DCM)
Japan’s largest wireless telecom operator has a 49% market share, holds $11 billion in cash, and pays a 3.2% dividend. Need I say more? Okay I will. It’s free cash flow if very strong and the company is reasonably valued at 11 times forward earnings and less than five times cash flow.
The company is a technological leader, being the first to roll out a high-speed third-generation (3G) network. In December 2010, it began offering long-term evolution (LTE) 4G broadband services, which have much higher profit margins than basic voice service. Phone service is recession-resistant as Japanese loves to talk. The company is also benefitting from the strong growth in emerging markets because it owns a 27% stake in India’s fourth-largest wireless operator (Tata Teleservices).
3. iShares MSCI Malaysia Index (NYSE: EWM)
Did you know that Malaysia is the largest supplier of plywood to Japan? Japan is a good customer to have. Overall, Japan is the largest importer of wood chips and plywood, the second-largest importer of logs, and the third-largest importer of lumber in the world last year. According to the Wood Resource Quarterly, Japan’s importation of logs, lumber and plywood in 2011 is likely to be the highest amount in 13 years.
Malaysia traditionally has been viewed as a backward economy with a very defensive market. But Prime Minister Najib Razak is widely viewed as someone who can lead Malaysia’s people and economy. The success of his efforts thus far has provided a roadmap to the country’s long-term development, and investors like what they see.
Malaysia currently runs a large current account surplus and has gone on a shopping spree for overseas assets. The country boasts ample foreign reserves that provide a cushion against external financial shocks.
With the first quarter of the year now on the books, Malaysia remains one of our favorite investment destinations for 2011.
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Right now, Yiannis recommends three Japanese stocks in his long-term growth portfolio. To find out the names of these Japanese recovery plays – along with all the foreign markets and individual foreign stocks Yiannis likes best right now — give Global Investment Strategist a try today!