Thursday, December 6, 2012

An Opportunity in the Japanese Elections?

In recent years, many investors have argued that things can't get much worse for Japan and it might be time to invest in the country's stocks.  Then things have gotten worse.  I sense a new cycle of analysis on Japan over the last month or so and, with it, a potential short-term driver for an upswing in Japanese stocks.  Here are the key points in my analysis:

1.  Japan is likely to hold elections on December 16, 2012, which may usher in a new government, including a new Prime Minister.  Shinzo Abe, who may win election as Japan's Prime Minister, has been calling for the Bank of Japan to take steps to weaken the Yen. A weaker Yen would help some of the large Japanese exporters, such as the Toyota, Honda, Panasonic, etc.  Perhaps under pressure, he has backed off these statements.  Markets, however, are likely to regard Abe as a driver of a weaker Yen.

2.  James Hunt of Tocqueville Value Fund points out the dismal returns on Japanese equities over the last 12 years and possibly correctly identifies this as a contrarian signal (the other alternative is that the returns already price in bumps due to undervaluation and contrarian buying and Japanese stocks are precisely where they should be).  According to Hunt:

"During the last 12 years – not a magic timeframe, but one which roughly corresponds with my stewardship of Tocqueville’s International strategy – the total return for the Nikkei 225 Index in US$ terms has been approximately zero. At the same time, the consolidated EBIT margin for the companies that comprise the index has gone from roughly 9.5% to 11.4% , aggregate earnings for profitable companies have gone from Yen 438 billion to Yen 608 billion and, importantly, the return on equity has increased from around 6% to around 10%. Correspondingly, the price to earnings ratio for profitable Nikkei 225 companies has gone from 24x to 15x, while the price/book value has compressed from 1.7x to 1.1x and the dividend yield has increased from 0.8% to 2.3%."

3.  The Press has been focused on the upcoming Japanese election and on gloom and doom.  The ultimate disrespect:  a recent story noting that adult diapers outsold infant diapers in Japan last year for the first time (a result of Japan's aging population and low birth rate):

So what's the trade here?  It's a risky one but you could wait to see if Shinzo Abe is elected Prime Minister and then invest in select Japanese exporters, an index fund tied to the Nikkei, or more deviously an ETF that is inversely correlated with the value of the Yen (see here for some ideas:  A last point.  This is probably not a party to be late to if you're looking for quick returns.  The election is on December 16, 2012 in Japan, which is 14 hours ahead of US Eastern Time.  In searching Google, I found no analysis of when we might expect to learn of the results.  One might guess early morning Eastern time, Sunday, with markets closed.  Probably a good idea to set up a Google alert to tell you when the results have come in.  A neat algorithm would start queuing trades immediatley upon news of Abe's victory and do nothing if he's defeated.  Beyond my current technical expertise but some of you might be capable.  Good luck.

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