The Nikkei 225 has fallen 18% since the beginning of May. The Japanese equity market is struggling with currency deflation paired with low levels of economic growth and structural economic issues with population growth. Despite all of these issues there is a narrow window of opportunity for buying Japanese equities.
Short-term pull-back followed by currency depreciation
Some believe that weak economic data in the short-term means that Japan’s monetary policy isn’t working. Others worry about too much expansionary monetary policy, and how it could overstimulate growth, causing an abrupt end to open market operations.
The recent weakness in Institute for Supply Management (ISM) data will only encourage the Bank of Japan to increase its inflationary asset purchases. Any weakening economic indicator will be met with a serious round of liquidity injections into the economy.
Some speculate that currency manipulation will end soon. However, Central Banks are slow to raise interest rates. For example, following the economic crash in 2008, the Federal Reserve kept interest rates near 0% before raising them.
The Nikkei 225’s decline is having a significant impact on investor sentiment across the world. The effects are cascading across stocks listed on the Nikkei 225. The reasoning for this decline is because of the sudden 3% decline in the value of the dollar relative to the yen.
The Federal Reserve has increased the total amount of assets on its balance sheet by 362.10% over the course of ten years. Comparatively speaking, the Bank of Japan has increased the size of its balance sheet by 39.46% over the same period. The Bank of Japan is trying to play catch-up with the Federal Reserve.
On a percentile basis, Japan is still a long ways away from catching up. The likelihood of Japan’s Central Bank ending open market purchases prematurely is low. Therefore the decline in the dollar-yen currency pair is likely to be extremely temporary.
The dollar-yen exchange rate is in a long-term bull market and the pull-back in the rate is an opportunity to buy in at a dip. Currency traders should be more focused on capturing the next 10% upswing in the value of the dollar relative to the yen over the course of a full year rather than trading in and out of the dollar-yen currency pair on a daily basis. An effective currency investment strategy may involve averaging in extremely slowly throughout the course of a year, this way mass currency fluctuations lower the damage done to a leveraged currency portfolio.
I am an enormous fan of buying Japanese equities
Sony Corporation (ADR) (NYSE:SNE) could be the investment opportunity of a lifetime. The mobile division was able to grow by 81.5% year-over-year. The growth in mobile was driven by the Sony Corporation (ADR) (NYSE:SNE) Xperia line of phones. Sony Corporation (ADR) (NYSE:SNE) Bank grew earnings by 18.6% year-over-year. The company’s mobile strategy paired with the growth in its financial services arm boosted earnings.
Analysts on a consensus basis believe that the company could grow its earnings by 52.4% on average over the next five years. To be fair, these high growth rates are because of currency fluctuations and growth in its mobile segment, along with cost cutting.
Toyota Motor Corporation (ADR) (NYSE:TM) is another favorite. While the company doesn’t present nearly as much upside in earnings, analysts on a consensus basis believe that Toyota Motor Corporation (ADR) (NYSE:TM) could grow earnings by 6.7% in fiscal year 2014, with a 32% growth rate in earnings for fiscal year 2015. The company also compensates its investors through a 1.65% dividend yield.
The strength of Toyota Motor Corporation (ADR) (NYSE:TM)’s business operations within the United States is unquestionable. The company was able to report 2.5% year-over-year growth in May auto sales and was the number one retail manufacturer for the May 2013 period.
Nomura Holdings, Inc. (ADR) (NYSE:NMR) is one of my favorite investment opportunities among the Japanese ADRs. The company has grown its revenues consistently over the past five years. The company reported 5.47% revenue growth, which is pretty impressive considering the slow economic growth in Japan, paired with the currency market fluctuations.
Analysts on a consensus basis anticipate that the company will grow earnings by 75% for the current fiscal year with 85.70% growth in the following fiscal year. The growth in earnings comes with a 25.9 earnings multiple, which is reasonable based on the amount of growth that is projected over the next two years. The bank also compensates its investors with a 1.11% dividend yield.
Conclusion
Going long on the dollar-yen pair could remain a lucrative investment position for currency speculators. However if leveraged foreign exchange is too much of a gamble, why not consider investing into Sony Corporation (ADR) (NYSE:SNE), Toyota Motor Corporation (ADR) (NYSE:TM) or Nomura Holdings, Inc. (ADR) (NYSE:NMR)?
Alexander Cho has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Buy Japan on the Dip originally appeared on Fool.com.
Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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