The Case for Japanese Stocks

By on December 16, 2010

Christopher Pavese, writer of the blog, “The View from the Blue Ridge,” touts the virtues of Japanese stocks. Pavese underscores the futility investors have faced investing in the Nikkei index over the past 20+ years:

The Spectacular Japanese Secular Bear Market kicked off in 1989 with the bursting of economic history’s largest real estate bubble. More than two decades later, the Japan Bear has lasted twice as long as any other secular bear market on record. A twenty year economic landscape branded by zombie banks, frightened management, bridges to nowhere, repeated bouts of deflation and broad-based despair has wreaked havoc on investor confidence. It’s hard to blame them as the country has been trapped in recession for 102 of the 239 months through yearend 2009. That’s a solid ten points better than Ted William’s .344 career batting average!

Pavese’s argument for higher prices is quite simple:

The predictable result is that Japanese Households despise equities, preferring the “safety” of domestic government bonds. As illustrated above, only 4% of Japanese household assets are invested in equities today [Pavese has an interesting pie chart at the link below]. In other words, there is plenty of room for upside, even before we consider the fact that Japanese assets are extremely underrepresented across global institutional portfolios as well.

Confidence levels clearly make the case that the Japan Bear is approaching a secular low and may have started a bottoming process. The Nikkei’s first decade of underperformance has been followed by a decade-long basing pattern. Technicians would point to any upside breakout from such an extended base as an indication of much higher prices to come.

Experience has taught us that calling major secular turning points in any market is difficult at best, so we prefer to leg into investments over time as long as we have an appropriate margin of safety. With many Japanese securities trading below book value, and even below cash value, we believe the risk-reward in buying Japan today appears very attractive. The trade would feel even more attractive with the identification of potential catalysts.

SMA Comment: Several individuals posted comments arguing that due to Japan’s poor demographic profile (the population is aging) and substantial debt at all levels the country is not attractive for investment. My opinion is that Japan has some great companies with substantial global sales and strong balance sheets, therefore, any problems isolated to the home country can be overcome and is no reason to avoid these stocks.

Source:Business Insider
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2 Comments

  1. Anonymous

    December 22, 2010 at 12:13 pm

    Good article. Japan has been an afterthought for years. Perhaps they'll get it together soon.

  2. stocksystm

    December 23, 2010 at 4:50 am

    I personally have a large position in the Vanguard Pacific ETF (VPL) which has the vast majority of its assets in Japanese stocks. I purchased VPL at $34.06 on 2/23/09 when the Nikkei was around 7,000 so I have a nice gain in it. I may sell a portion of the position after the new year.

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