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By Martin Hutchinson
The whipsaw trading we've seen the last few weeks has been unsettling for everyone with a stock portfolio, but they've been infuriating for those of us with a portfolio of sound Asian common stocks.
The financial institutions that helped create the mortgage rubbish that now litters the U.S. financial landscape have been fueling my fury. You see, they've been selling the mortgage rubbish, wanting to get it off their books – as they should.
Unfortunately, in creating this big mess, these financial-service firms will probably spark a recession that roars through the U.S. economy, incinerating everything in its path. In anticipation of this capitalist conflagration, investors have torched every global stock with any connection to the mortgage rubbish. But they've also singed perfectly good companies, with no connection to the rubbish at all.
Take Japan, for example. A few Japanese companies – such as investment bank Nomura Holdings Inc. (NMR) – because they were involved in the subprime-mortgage debacle.
Maybe these firms should lose a few points for being dumb – and for getting involved in disasters outside their home market, where they didn't really need to be. But, at this stage, they certainly shouldn't be so steeply marked down for taking on U.S. market risk.
Nomura is a particularly good example of this investor overkill. The investment bank sold all its subprime mortgage holdings, got out of the business and fired everybody involved – three full months ago. And Nomura has only been a modest participant to begin with, so it was a lot easier for it to do this than, say, for The Bear Stearns Cos. Inc. (BSC). But, even so, it seems unfair to penalize Nomura so severely for exposure to a market in which they are no longer involved.
Needless to say, there are a few dummies, even in Japan. Mizuho Financial Group Inc. (MFG) has managed to increase its exposure to the moth-eaten U.S. banking sector by buying $1.2 billion worth of stock in Merrill Lynch & Co. Inc. (MER). Maybe Mizhuo bought at the bottom, but on the other hand, maybe it didn't. Surely, Japan's banking system has had enough disasters of its own without voluntarily becoming involved with the problems of others.
Nevertheless, Japanese companies in general have little exposure to the risks in the U.S. economy. Some, like Sony Corp. (SNE), may be large exporters to the United States, and will suffer if the U.S. economy skids its way into a recession, or if the greenback continues to weaken against the yen.
But even if that happens, the Japanese market for video games is itself a large and robust one, and both Sony and videogame producer Konami Corp. (KNM) have excellent domestic businesses that won't be affected by any U.S. hiccups. Indeed, Sony has just won an important battle, by which its "Blu-Ray" high definition video format has become dominant over the rival HD-DVD format developed by rival Microsoft Corp. (MSFT). Since Blu-Ray was included on the Playstation 3, Sony can thank its millions of loyal "gamers" for that victory.
Korea, too, is a market that's trading at much cheaper levels than its U.S. counterpart. And it's also a market that has no involvement with the U.S. mortgage debacle, meaning there's no clear reason why it should be lumped in with other global "subprime sinners."
Kookmin Bank (KB), for example, is trading at a Price/Earnings ratio of less than 9 based on trailing earnings, and currently carries a P/E of less than 7 based on leading earnings. In other words, even back in 1933 – in the depths of the Great Depression – it would have been considered undervalued. Yet Korea is projecting 5% growth this year and has just elected a new, more-business-friendly president [For a brand-new Money Morning investment research report, "Why South Korea is set to Become the Biggest Economic Story of 2008," please click here. This report is free of charge].
On days when Wall Street falls out of bed, Japan, Korea and other Asian markets generally also land on the floor with a bump. That makes no sense, and market irrationality is generally worth buying. In Japan, the index fund for smaller Japanese companies is the SPDR Russell/Nomura smaller companies exchange-traded fund (JSC), and has fallen more than 25% in the last year. Those companies are generally dependent upon the domestic Japanese economy, and not on exports into flagging international markets such as the United States. Given the prospects these smaller Japan-based companies have for continued financial strength, they must surely also be due for some new thinking when Japan finally decouples itself from Wall Street.
Naturally, both Sony and Konami also are worth considering, though both trade at the somewhat higher multiples that are typical of tech-sector plays.
In Korea, Kookmin Bank like it's well-worth a modest investment, as you can be pretty sure that – based on what is now know – that you are buying on the cheap.
A bear market – like war – is hell.
For those who own shares in well-managed, reasonably priced companies that are knocked down by a general wave of negativity, bear markets are also infuriating.
But for those who don't yet own such companies – and who want to pick up some bargains – those same bear markets can represent a fabulous buying opportunity.
News and Related Story Links:
- Digital Trend News:
Gartner Forecasts Blu-ray Victory in 2008.
- Money Morning Special Investment Research Report:
Why South Korea is set to Become the Biggest Economic Story of 2008.
- Money Morning Investment Research Report:
Three Ways to Profit in the Face of Surging Inflation.