While Standard & Poor's is raising the warning flag about Japan's perilous economic state, several Canadian money managers are loading up on the country's stocks.
On Wednesday, the credit-rating agency lowered its outlook on the nation's sovereign debt to negative from stable, citing the mounting national debt arising from the devastating March 11 earthquake. But the warning hasn't dissuaded investors who see the country's stock market as a rare bargain in a world of expensive equities.
Japan is very compelling now because "the market is cheap," said Charles Edwardes-Ker, a portfolio manager with TD Asset Management Inc. "Japan is trading at one times book value whereas most of the other [global]markets are trading at two times book."
To deal with the ravages of the earthquake and the subsequent crisis at a nuclear power plant north of Tokyo, the Bank of Japan has pumped trillions of yen into the financial system, while Japanese companies are repatriating money from overseas to help rebuild the world's third-largest economy.
"There is still a lack of earnings visibility," said Mr. Edwardes-Ker, who expects Japanese corporate profits to take a hit because of power blackouts and supply-chain problems. "But I think confidence will return. The earnings were really looking good before the earthquake."
He's betting that the problems at the Fukushima Daiichi nuclear plant will trigger a rethinking of Japan's energy strategy, and increase the country's use of natural gas. "We have been adding quite substantially to [our position in]Tokyo Gas … It is probably going to get a long-term growth profile as a result of this [crisis]"
Mr. Edwardes-Ker is also adding to his existing position in Keisei Electric Railway Co., which he believes has been unfairly punished by the market for short-term disruptions in service. Its rail line runs from Tokyo to Narita International Airport; it also owns 20 per cent of Oriental Land Co., which runs the Tokyo Disney Resort. "The stock fell 25 per cent after the earthquake," he said.
Greedy When Others Are Fearful
Tim McElvaine, president of McElvaine Investment Management Ltd. in Victoria, had already been buying Japanese stocks before the earthquake, but added more afterwards as their prices fell. He is upbeat on their potential as a result of Japan's decision to inject more liquidity into its financial system following the earthquake.
"It doesn't mean that the stock market won't go down in the short term, but when you have cheap valuations and lots of liquidity, that is a good set up," said the deep-value investor who is just back from a trip to Tokyo last week. "Japan is back to levels that rival the lows of the last decade."
Mr. McElvaine recently snapped up shares of Japanese electronics giant Sony Corp. for the foreign content portion of his Mackenzie Universal Canadian Value Fund and his McElvaine Investment Trust. "This is as cheap as Sony has been in the last 10 years," he said. "It trades below book value."
He also bought shares of Shinsei Bank Ltd., cosmetics maker Pola Orbis Holdings Inc., investment firm Ichigo Asset Management Ltd. and soy-sauce maker Kikkoman Corp.
Kikkoman stock has been hurt because of worries about foreigners eating less Japanese food and the impact of rising soybean prices on margins, he said. "From my point of view, it is a strong global franchise."
Lorne Steinberg, founder of Lorne Steinberg Wealth Management Inc. in Montreal, started buying Japanese stocks a year ago when he found many were trading at less than the cash on their books, with virtually no debt. After last month's downturn, some of his holdings are even cheaper.
"The market is completely out of favour, which we like," said the deep-value investor. "When people look at the Japan, they simply look at the Nikkei 225 , but that is more expensive than the stocks we are buying."
Mr. Steinberg, who owns 13 stocks in his Steinberg Value Equity fund and is in the process of buying more, recently added medical equipment supplier JMS Co. Ltd., musical instrument maker Yamaha Corp. and steel manufacturer Yodogawa Steel Works Ltd.
"The decision by Standard & Poor's has no influence on our decision-making process," he said. "We expect the government to take the necessary steps to get the situation under control."
Land of the Rising Stocks: Top Picks
Charles Edwardes-Ker, TD Asset Management Inc.
He likes Impex Corp., a natural gas producer with interests in the Minami-Nagaoka Gas Field in Japan and major new projects in Australia and Indonesia. "The big new big fields are not in production yet, but are coming on stream," he said. "We see that as part of Japan's energy solution if it starts to rethink its whole nuclear strategy."
Tim McElvaine, McElvaine Investment Management Ltd.
He picks the online brokerage Monex Group, which has made an offer to buy its U.S. peer TradeStation Group for about $411-million (U.S.), and recently acquired Hong Kong-based Boom Securities. "The balance sheet and corporate governance is reasonably good," he said. "It trades at almost 75 per cent of book value."
Lorne Steinberg, Lorne Steinberg Wealth Management Inc.
He's a fan of Kawasumi Laboratories Inc., a maker of medical equipment such as catheters, infusion tubes and other pharmaceutical products. "With Japan's aging population, these types of companies have lot of growth prospects," he said. "It has a 2.7 per cent yield, trades at eight times trailing earnings and has no debt. … It has a decent dividend considering that 10-year bonds in Japan yield about 1.2 per cent."