A series highlighting news and trends in international business that matter to investors looking for opportunities outside of Canada.
The Japanese stock-market rally sparked three years ago by monetary stimulus and optimism about Abenomics has stalled amid concerns about the country's sluggish economy and a recently rising yen.
But while the market in the world's third-largest economy has been turbulent recently, some money managers are still bullish on the battered stocks of financially strong companies and on certain industry niches.
Lorne Steinberg, president of Lorne Steinberg Wealth Management Inc., began buying Japanese stocks in 2010 because he found companies trading at less than the cash on their books, with little or no debt.
"Japan remains the cheapest of all the major stock markets by far of the developed world," said Mr. Steinberg, a deep-value investor. He has about 30 per cent of his global equity fund in Japanese stocks and a similar amount in cash.
The Japanese market began climbing after Prime Minister Shinzo Abe was elected in December, 2012. His bold three-pronged strategy to revive the economy, which was dubbed "Abenomics," included monetary easing, fiscal stimulus and structural reforms that include changing the way companies operate.
Japan's Nikkei 225 Index surged to an 18-year high of 20,868 points last June, but is now hovering around the 16,000 level. The retreat followed an April, 2014, sales-tax increase. The economy also contracted in the final three months of 2015. And the yen, weakened by flooding the financial system with cash, has been rising as investors flocked to the safe-haven currency amid global market turmoil.
The outlook for the Japanese economy may be uncertain, but "there are pockets of opportunities," says Mark Lin, a portfolio manager at CIBC Asset Management Inc. who invests in Japanese stocks in his CIBC Asia Pacific Fund.
"The Japanese population is growing old very fast, and Japan has the longest life expectancy in the world," so that makes drugstore companies and manufacturers of medical devices attractive, Mr. Lin said. "We own five drugstore companies [including Tsuruha Holdings Inc. and Sugi Holdings Co. Ltd.] in our portfolio."
Japanese exporters are appealing because they can reach beyond the limited domestic market for future earnings growth, he added. While a strengthening yen recently has been a slight drag on earnings, the currency had been a tailwind for exporters when it weakened two to three years ago.
One exporter he likes is Hoya Corp., a medical-technology company that makes everything from prescription lenses to medical endoscopes and components for semiconductor chips. It gets 70 per cent of sales from foreign markets, he said.
Recently, the Bank of Japan cut interest rates below zero to push banks to lend more to stimulate the economy. "I think the market was spooked by this … so it reacted very violently," said Mr. Lin. "Not everyone is sure that this policy will necessarily be positive for the economy."
Charles Edwardes-Ker, a portfolio manager with TD Asset Management Inc., suggests the Japanese market is being "unfairly punished" given that the country benefits from falling oil prices and its improving corporate governance. As part of the structural reforms, more Japanese companies are rewarding shareholders with dividend payouts and share buybacks.
In terms of valuations, the market has recently traded close to its 2008 bottom at just over book value, noted Mr. Edwardes-Ker, who runs the TD Japanese Growth Fund. "It seems crazy to me when Japanese companies are pretty cash-rich, and the banking sector has no problems these days. But foreign investors tend to dominate trading on the Japanese markets … and people are taking profits."
Against a backdrop of a rising yen recently, his preference is to invest in more domestically focused Japanese companies whose stocks could also get a lift from improved corporate governance policies and friendly mergers.
One favourite holding is Keisei Electric Railway Co. Ltd., which runs a line from Tokyo to Narita International Airport. It also has a 20-per-cent interest in Oriental Land Co. Ltd., which owns Tokyo Disneyland.
"It's a play on inbound tourism," he said. Japan is getting about 20 million foreign visitors annually, up from about 8 million five years ago. The new target is 30 million visitors, and that goal should get help from increasing Chinese tourists, as well as Tokyo hosting the 2020 Summer Olympics, he added.
But Mr. Steinberg prefers Japanese exporters because he doesn't want to own companies reliant on a slow-growth economy. Most of the names he likes are firms making electrical components or equipment used in the manufacturing process. "The Japanese have thousands of great engineering companies," he said.
Aida Engineering Ltd., a maker of machinery that is part of the manufacturing process for products such as cars, is in his portfolio. "This is a typical Japanese company," he said. "They have survived all kinds of ups and downs, and have net cash. During downturns, these companies just keep ploughing money back into research and development. They want to get ahead and stay ahead of the curve."
Top picks among U.S.-listed Japanese stocks
Lorne Steinberg, Lorne Steinberg Wealth Management
Yamaha Corp. American Depositary Receipt (ADR): YAMCY-OTC
The maker of musical instruments for professionals and the mass market has a strong global brand, net cash on the balance sheet and strong earnings growth, he says. "It has traded around 16 times forward earnings recently … But earnings [for the year ending March 31] will be up roughly 40 per cent over last year." A global recession, however, would have a negative impact on Yamaha, he noted.
Charles Edwardes-Ker, TD Asset Management
Toyota Motor Corp. ADR: TM-NYSE
Toyota is the world leader in auto production, has a strong balance sheet, and trades cheaply at about 8 times earnings, he says. "Profits have done very well, but I think they are going to be flat for the next couple of years … This really a valuation call." Its stock could get a lift as Toyota buys back shares "which is all reasonably new," he said. The dividend yield is attractive at more than 3 per cent.
Mark Lin, CIBC Asset Management
Sysmex Corp. ADR: SSMXY-OTC Market
The health-care services giant has a profitable business model with 82 per cent of revenue coming from overseas markets, he says. Sysmex makes reagents and equipment for clinical testing, including blood and immune tests. Its stock trades at more than 30 times forward earnings but that multiple is justified by the earnings growth, he said. A strengthening yen, he noted, could be a headwind.