By Martin Hutchinson
Contributing Editor
Money Morning
Investors who pay attention to Japan’s looming election can expect to be well-rewarded for their time.
Normally, we confess, Japanese elections don’t matter much, because the same guys always win. However, this one – set for Aug. 30 – looks different: It may actually bring about the first real change in Japan’s government in 55 years. That’s important. The opposition has different ideas about what the Japanese economy looks like. That means you should be buying different Japanese stocks, not the well-known names.
The Liberal Democratic party (LDP), in power since 1954 except for 11 months in the 1990s, hasn’t done a bad job. After all, Japan is hugely richer than in 1954. However, after a successful period in 2001-06, the country has had three prime ministers in three years. The current leader, Taro Aso, believes in heavy government spending, particularly on infrastructure. That reflects the party’s traditions, which have favored exporting companies and the construction sector. Those traditions and priorities have also made Japan’s public debt 180% of gross domestic product (GDP).
The opposition Democratic Party of Japan includes the Socialists, and favors higher social spending. However, it also wants to encourage domestic consumption, and to kill the big construction projects on which the LDP has spent so much. Economically, the Democratic Party’s platform makes sense, certainly given its shift in emphasis away from the programs focused on in the last few years. Politically, voters are tired of the LDP and badly want a change. Hence the DPJ is likely to win a majority in next month’s election.
That probable victory has major implications for investors.
The Japanese market is still down more than 75% from its 1990 high, although it has rebounded about 30% from its March lows. Japan had a bad recession: The Economist expects 2009 GDP to be 6.1% below 2008. Nevertheless, the economy looks poised for recovery. If that happens, the market will do well, and consumer-oriented stocks will do especially well.
Many Price/Earnings (P/E) ratios look high – as is common in Japan – but Japanese accounting is conservative and a real economic recovery could bring rapid earnings growth. Still, in searching for the most-promising profit plays, I will look for P/Es of 20 to 22, or less, to keep values reasonable.
How to buy them: Most Japanese companies these days trade as American Depository Receipts (ADRs), that trade only on the “Pink Sheets.” Those are not very liquid in New York. However, some brokers – such as E-Trade (Nasdaq: EFTC) – now allow you to trade directly on the Tokyo stock exchange. So I’ll give you both the Tokyo symbol and the OTC ADR symbol, and you can choose which way to go.
Here are the seven ways to play Japan’s election (with one bonus pick for good measure):
Check the companies carefully before investing (most have Web sites), but the above are some suggestions of companies in interesting sectors that appear solid and not overpriced. If you don’t feel confident about investing directly in Japan, you could also consider investing in the largest Japan-focused exchange-traded fund (ETF), iShares MSCI Japan index (NYSE: EWJ). The EWJ ETF currently has a P/E ratio of 15.
[Editor's Note: When it comes to global investing, longtime market guru Martin Hutchinson is one of the very best – because he knows the markets firsthand. After years of advising government finance ministers, crafting deals with global investment banks, and analyzing the world's financial markets, Hutchinson has used his creative insights to create a trading service for savvy investors.
The Permanent Wealth Investor assembles high-yielding dividend stocks, profit plays on gold and specially designated "Alpha-Dog" stocks into high-income/high-return portfolios for subscribers. Hutchinson's strategy is tailor-made for periods of market uncertainty, during which investors all too often go completely to cash - only to miss some of the biggest market returns in history when market sentiment turns positive. But it can work in virtually every market environment.
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