Money managers and advisers have spent their careers avoiding Japanese stocks.
But now, some prominent stock pickers, including
BlackRock Inc., First Eagle Investment Management LLC, Thornburg Investment Management Inc. and Wasatch Advisors Inc. are building up significant stakes in Japanese shares.
The Japanese market offers some of the best values in the world, these managers say. Japanese firms have loads of cash, solid balance sheets, world-class businesses and are benefiting from growth in emerging markets.
“As a value investor, how are you not buying in Japan?” said Abhay Deshpande, co-manager of First Eagle's Global (SGENX), Overseas (SGOVX), U.S. Value (FEVAX) and Gold (SGGDX) funds.
“We have no competition in terms of buying things” in Japan, he said. “My question is: Why is no one else there?”
The reason might be that the country is still seen by many as an economic disaster.
Japan has yet to emerge from a 20-year
bear market. It is still mired in deflation, has an aging population, is saddled with debt, and its credit rating is under assault.
What's more, shareholders are generally not the top priority for corporate managements in Japan. Throw in a possible slowdown in China — a key export market for many Japanese companies — plus growing competition from export-oriented emerging economies, and the picture looks even less attractive.
But those reasons are exactly why Peter Lucas, an investment strategist at RBC Wealth Management, turned positive on Japan in November.
“The [Japanese] market certainly seems to have all the characteristics of nearing an end to a long secular
bear market,” he said.
Last fall, “no one had a good word to say about it,” Mr. Lucas said. “In fact, it was revulsion, really — people were saying Japan was cheap, it would always be cheap and they'd never touch it again.”
The country is still such a pariah that only a very few mutual funds have made major bets on a turnaround.
“Our weighting is well above what most investors have,” Mr. Deshpande said.
The First Eagle Global Fund has 21% of its assets allocated to Japanese stocks, and the Overseas Fund has about a 30% weighting in Japan. Japanese stocks dominate the top 10 holdings of each portfolio.
Smaller-cap stocks in Japan have been “abandoned,” said Blake Walker, co-manager of the Wasatch Global Opportunities Fund (WAGOX).
On a December trip to Japan, his interpreter from a local securities firm, who had more than 30 years' experience, “hadn't ever seen three-quarters of the companies we visited,” Mr. Walker said.
“There's a whole bunch of $200 million to $400 million market-cap [stocks] at single-digit [price/earnings ratios],” he said. “We've never seen them that cheap.”
Mr. Walker, whose fund had an 8.5% allocation to Japanese stocks at the end of last year, said that he is looking to add more.
STILL A VALUE TRAP?
Even Japan bulls concede that they might have to ride out more of the suckers' rallies for which Japan has become famous.
“In the past, the [Japanese] market has been so disappointing, it's very hard for me to say that in 2010, Japan is the place to be,” said Lei “Rocky” Wang, co-portfolio manager of the Thornburg International Value Fund (TGVAX).
“So I have to be humble” in recommending Japanese stocks, he said.
Mr. Wang's fund had 8.2% of its allocation in Japanese stocks as of September, up from 7% in March.
But those who favor Japanese stocks contend that the bad economic news from Japan may be overblown and that even if the macro picture doesn't improve, many companies there should still do well.
“A lot of arguments that the bears use [about Japan] are not correct,” Mr. Deshpande said, like the claim that government debt is 200% of gross domestic product.
That figure ignores the fact “one [government] entity might purchase bonds from another,” so debt nets out to 80% to 90% of GDP, he said.
Plus, average maturities are short, so higher rates wouldn't have a disastrous impact, Mr. Deshpande said.
And if interest rates increase with higher inflation, that would be a good thing for Japan, observers said.
BlackRock sees the Japanese economy as running lean and has raised the allocation to Japanese stocks in its Global Allocation Fund (MDLOX) to about 6.5%, up from 5% to 6% last November.
“They've been very good at reducing costs, cutting bonuses and capital expenditures, and taking a lot of impairment charges last year,” said Ben Moyer, a senior portfolio manager and member of BlackRock's global allocation team. “They haven't raised wages in 15 of the last 20 years.”
In the fourth quarter, Japanese unemployment dropped, and GDP and exports were up, Mr. Moyer said.
Meanwhile, Japanese consumers are in relatively good financial shape, Mr. Walker said.
“They don't have quite the same hangover” from the
recession that U.S. or U.K. consumers do, he said.
In any event, Japanese companies are truly global, bulls say, insulating them somewhat from macro problems.
Sporting goods maker Shimano Inc., for example, does 80% to 90% of its business outside Japan, Mr. Deshpande noted.
“They're a natural hedge for a currency decline as any exporter is,” he said.
Likewise for Komatsu Ltd., the construction and mining equipment company, which gets more than half its sales from emerging markets, Mr. Wang said.
There are also numerous Japanese-specific mutual funds and exchange-traded funds that allow investors to invest in Japanese companies.
E-mail Dan Jamieson at [email protected].
