Hampered by anemic economic growth and shrinking consumer demand at home, Japanese companies are expanding their operations overseas. For contrarian investors, experts say the trend may offer a rare opportunity.
According to a report in the Wall Street Journal today, Japanese companies are increasingly venturing outside the country to keep growing following the March 11 earthquake and tsunami last year, which shattered Japan’s economy. Bolstered by healthy balance sheets and a strong yen, these firms collectively have invested more than $34 billion overseas and are on track to beat last year’s record $84 billion, says researcher Dealogic.
This “global buying spree” comes at a time when American investors’ interest in Japanese stocks is fading. Investors this year have yanked about $100 million from Japanese mutual funds and exchange-traded funds, according to fund tracker Lipper, following inflows of $2.2 billion in 2011. But experts say the strengthening yen – up 2% against the dollar this year – gives Japanese companies the ability to acquire foreign companies at a discount. That could lift these firms’ profits, and ultimately attract more investors, says Tom Roseen, head of research services at fund tracker Lipper. “We’re finally seeing profitability in the rebuilding of some of these companies,” says Roseen.
Some advisers say investors might consider Japan for another reason altogether: Stocks are cheap. The trailing price-to-earnings ratio (a common metric for valuing stocks) of Japan’s Nikkei 225 index is currently 13.9, compared to 18.4 the day before the earthquake. Ten years ago, stocks traded at a price-to-earnings ratio of 35, according to FactSet Research. “If you’re willing to be a patient investor, there is potential for upside,” says Feldman.
Critics warn, however, that investing in Japanese shares remains risky. First, some of the acquisitions these firms are making could backfire. And while the stronger yen helps deal activity, it hurts global demand for Japanese cars and technology — a big blow for a country that relies heavily on its exports, says Roseen. As a result, Japanese stocks could drop further before they rebound, experts say. “They could keep getting cheaper,” says Paul Christopher, chief international investment strategist for Wells Fargo Advisors.
Investors who want to get a piece of Japan would be smart to start small, says Jeff Feldman, an adviser with Rochester Financial Services in Pittsford, N.Y. He recommends investing up no more than 5% of your portfolio in the country, and to build up that position over many months with smaller purchases.
Christopher, on the other hand, says investing in Japan should be a short-term tactical play and recommends a smaller allocation of no more than 2%. Some investors may already have exposure to Japan through broad international funds. For instance, the MSCI EAFE index, which tracks developed international markets, is about 20% invested in Japan.
Mutual funds and ETFs that focus on Japan can give investors specific exposure to the country, say experts, while allowing them to keep their investment liquid. For example, the largest ETF in the category, the $4.9 billion iShares MSCI Japan Index fund (EWJ) is down 2% so far this year and charges .51% or $51 for every $10,000 invested, according to Morningstar.