Bet on emerging markets via the Japanese markets

Japan’s Stocks Offer Bets on China 20 Years After Nikkei Peak
By Masaki Kondo and Toshiro Hasegawa

Dec. 28 (Bloomberg) — Japan’s Nikkei 225 Stock Average, the world’s worst performer in the 20 years since its record high, offers a cheap way to bet on emerging markets, according to Mitsubishi UFJ Asset Management Co.

Investors should buy Japanese steelmakers, machinery manufacturers and plant builders to benefit from economic growth in countries from China to Brazil, said Kiyoshi Ishigane, a strategist at the unit of Japan’s largest listed bank with $68 billion of assets. China has allocated 89 percent of its 4 trillion yuan ($586 billion) stimulus fund to infrastructure, according to an August report by the McKinsey Global Institute.

“Infrastructure spending will continue to grow for a long time in emerging markets,” Ishigane said. “That’s where Japanese companies have an absolute advantage.”

The idea of investing in Japanese companies as a play on emerging markets shows how much the world has changed in two decades. Japan’s nominal gross domestic product rose 23 percent between 1989 and 2008, while that of the U.S. increased 163 percent, according to data compiled by Bloomberg. During the same period, Brazil’s economy grew 278 percent and China’s surged 17-fold.

The Nikkei has lost 73 percent since it climbed to a record 38,915.87 on Dec. 29, 1989, the worst performance of the world’s major markets.

44,000 Level

On Jan. 3, 1990, the day before asset valuations began collapsing, the Nikkei newspaper’s top headline read, “Nikkei Average May Reach 44,000 at Year-End,” citing 20 heads of major companies. The most promising stock for 1990 was Shimizu Corp., the newspaper said. The construction company’s shares have since fallen 87 percent.

As much as 80 percent of Louis Vuitton products worldwide were bought by Japanese, while international opera stars sang for fans paying 30,000 yen ($330) a ticket, according to a Nikkei story dated Dec. 31, 1989.

In July 2008, China overtook the U.S. as Japan’s biggest export market, according to Finance Ministry reports.

Consumer brands such as Unicharm Corp., a diaper supplier, and cosmetics makers Fancl Corp. and Shiseido Co. are expected to expand business in China, said Peter Eadon-Clarke, director of strategy for Macquarie Group Ltd.’s Tokyo brokerage.

“Cosmetics companies have decades of research on Asian skin, Asian make-up, so there is a competitive advantage in that sense,” said Eadon-Clarke.

Deflation Factor

Mitsubishi UFJ Asset Management started a fund in November investing in Japanese companies benefiting from Asian demand. The fund owns shares in Unicharm, Komatsu Ltd., a maker of earth-movers, and Fanuc Ltd., an industrial robot manufacturer, according to a company report.

Wages fell in Japan for a 17th-straight month in October and consumer prices dropped 1.7 percent in November from a year earlier, according to government reports.

“Deflation has weighed on Japan’s nominal GDP, which tends to determine the direction of the stock market,” said Mitsubishi UFJ Asset Management’s Ishigane.

Concerns over growth and earnings made Japan’s benchmark gauges the worst performers among the world’s 40 largest stock markets this year, with the Nikkei 225 rising 18.5 percent and the Topix gaining 5.8 percent. The yen averaged 93.65 to the dollar in 2009, the highest level since currencies began trading freely in 1971. A strong yen reduces companies’ overseas revenue in local terms.

‘Undervalued’ Stocks

Shares on the Nikkei trade at 1.4 times book value. The Shanghai Composite Index is at 3.3 times, while Brazil’s Bovespa Index trades at 2.1 times. Both of those measures have soared more than 70 percent in 2009.

“If I had 5 trillion yen, I’d spend it all on Japanese stocks,” said Atsuto Sawakami, chief executive officer of Sawakami Asset Management Inc., which manages the equivalent of $2.3 billion in Tokyo. “They’re undervalued.”

Of the Nikkei 225 members, Honda Motor Co. posted the biggest gain since December 1989 with a 240 percent advance, followed by Canon Inc. and Shin-Etsu Chemical Co.

In the 1980s, Japanese snapped up overseas assets ranging from New York City’s Rockefeller Center to Vincent Van Gogh’s Sunflowers painting. Yoshihiro Ito, 66-year-old senior strategist at Tokyo-based Okasan Asset Management Co., recalled that people bought any asset they could, from stocks to golf- club memberships because prices were soaring.

“I got a golf club membership for 900,000 yen in 1981, and a broker offered 11.7 million yen for it in 1989,” said Ito. “I had an illusion it would rise further and didn’t expect the price would later fall to a mere 150,000 yen. Now, I don’t know how much it’s worth, nor do I go to the club anymore because it’s too far.”