The planned monetary base expansion by the Bank of Japan (doubling in size between 2012 and 2015) would lead to higher inflation and GDP growth rates into mid 2015. Despite the recent correction, these actions should push Japanese equities forward to the detriment of US and European competitors. I believe that the correction in the yen is only around half complete. Hence, the depreciation will likely run substantially further than many analysts consider possible. As a matter of fact, I see the yen trading at 120 per US dollar by mid-2014. Besides, those reflationary pressures should benefit domestic insurers, real estate stocks and exporters. Here I propose three long equity ideas.
A Japanese real estate play
DAITO TRUST CONSTRUC (OTCMKTS:DITFY)’s shares should go higher not only because real estate has always been a good inflation hedge; the company’s earnings growth prospects and undervaluation should also help.
Over the long term, DAITO TRUST CONSTRUC (OTCMKTS:DITFY) can differentiate itself by taking advantage of increasing demand for estate tax liability mitigation for seniors due to the aging society. As a matter of fact, I consider this to be the main driver of Daito’s performance going forward.
Despite the high foreign ownership of shares (+55%), demographic awareness should push domestic investors to invest in DAITO TRUST CONSTRUC (OTCMKTS:DITFY) Trust more aggressively. With a return on equity at above 30% and a reasonable expected dividend yield (4%), DAITO TRUST CONSTRUC (OTCMKTS:DITFY) Trust’s robust business model makes it a good long-term investment idea.
A no-brainer idea
Of course the no-brainer idea is Toyota Motor Corporation (ADR) (NYSE:TM). The company is a huge exporter to the US (US dollar revenues) and produces a big amount of its cars in Japan (costs in yen). The company, up by over 25% year-to-date, is still trading at a reasonable level (12 times earnings).
I anticipate profits reaching new highs amid yen weakness and growth in consolidated shipment volume. Moreover, Toyota Motor Corporation (ADR) (NYSE:TM) has a global production capacity of 9.5 million units (Toyota and Lexus combined) which leaves room for higher utilization. On top of all this, Toyota Motor Corporation (ADR) (NYSE:TM)’s net cash in the automotive segment is close to the company’s target, which raises the likelihood of substantial dividend increases (Toyota’s cash dividend yield stand at 1.5%).
This insurance business should benefit from further yen depreciation
Ms&Ad Insurance Group Holding Inc (OTCMKTS:MSADF) should not only benefit from higher inflation expectations – all Japanese insurers will – but should also have good operational years in 2013 and 2014.
During the company’s first quarter, profit increased mostly as a result of substantial improvement of investment income due to a recovering market. Operationally, the company needs to improve. At both Mitsui Sumitomo and Aioi Nissay Dowa (both part of the Ms&Ad Insurance Group Holding Inc (OTCMKTS:MSADF) group), the combined ratio remains above 100%, which indicates that the company pays out more money than the premiums being received. Nevertheless, loss ratios have gotten better at both subsidiaries.
All of the above taken into account, profit is expected to be boosted yoy by lower payouts for non-life insurance in categories like fire, auto, and other casualty insurance, as well as a decline in valuation losses on marketable securities. Besides, there was positive news for shareholders: dividends are expected to rise, and a share buyback program was announced (0.4% of shares outstanding).
Bottom line
All the ideas mentioned above are supposed to benefit in US dollar terms as the yen depreciates. I chose companies that I expect to improve operational performance at the same time as their costs in US dollars diminish (like in the case of Toyota Motor Corporation (ADR) (NYSE:TM)) and/or their income is boosted by inflation expectations (Ms&Ad Insurance Group Holding Inc (OTCMKTS:MSADF)).
Federico Zaldua has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Playing the Yen Game originally appeared on Fool.com.
Federico 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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