The results of the latest Nomura survey of individual investors in Japan (August 14th) show Japanese investors are slightly less bullish — naturally given Ukraine/Russia, Iraq, Israel/Hamas, etc — though they are not getting spooked out of equities. Investors remain upbeat on the yen (correspondingly bearish on the euro) and they say they like Japanese equities best again (most bullish on capital goods and bearish on consumer goods).
Nomura’s (NYSE: NMR) (TYO: 8604) monthly “Individual Investor Survey” was released yesterday. (Here’s my walk-through for May). Japanese investors are slightly more bullish, while they remain concerned about international affairs with a particular interest in forex developments, naturally. Their top sector focus (most appealing/unappealing) was unchanged: they like capital goods and autos, somewhat surprisingly in my opinion; bearish on transportation and utilities, unsurprisingly. Japanese investors seem to always have a place in their heart for higher yielding currencies, hence their fondness for the Australian dollar, though they also like the yen, which is interesting because 65% of respondents see a weaker yen on the horizon. So what investment do Japanese investors like most?
Value investors tend not to care much about monthly wages and labor reports published by the government. That’s not to say compensation practices and levels don’t matter at a particular company one is researching. In Japan it’s just they matter for different reasons. Here’s why wages seem like they are always reported to be falling in Japan:
Nomura’s (NYSE: NMR) (TYO: 8604) monthly “Individual Investor Survey” was released late last week. This is worth an investor’s time to flip through for a read on the psychology of the Japanese investor. Nomura also lists participants’ most-watched stocks (keep reading for a screen cap) and includes questions that deal with current developments (this month’s concern the consumption tax hike impact and shareholder meetings). I discussed Nomura’s survey as a resource in my book, Investing in Japan. The survey is one of a few resources that will enhance English-language access to, and understanding of, the Japanese market.
Value investors will still find excellent valuations in Japan despite the market’s gains over the past several weeks. As I say again, in my latest exclusive at Seeking Alpha, “Investing in Japan Beyond the Platitudes,” the most interesting opportunities are in domestic-demand small/mid-cap companies. I’ve received a number of messages asking about WisdomTree’s hedged Japan Equity fund (DXJ). Yes, DXJ has done well, much better than iShares Japan (EWJ), in this rally. However, I’m not a big fan of DXJ for some of the same reasons I don’t like EWJ. Over 270 portfolio holdings for DXJ and 300 for EWJ mean outside of the top-few positions no one stock is really going to move the needle; the top holdings are not dissimilar from the benchmark indexes nor the one-trick pony mutual fund managers. Exporters are already cyclical and the demand/supply (selling) of their shares only makes them more cyclical — this is even more a concern should positions get closed en masse in DXJ given its smaller asset base that has surged only recently.
Finally, I don’t see the yen “blowing up” — it’s not as simple as some may wish or have been led to believe to see a currency like the yen or a country like Japan “blow up” in a straight line. Beware macro pontification coattailing. The great 2005 Nikkei rally saw a roughly 10% weakening of the yen. Overnight, Economy Minister Akira Amari warned excessive yen appreciation may benefit exporters but would hurt people’s livelihoods. The business press is concluding Minister Amari as having suggested the yen has weakened enough. In fact, too weak of a yen begins to hurt exporters if materials costs don’t start to decrease. In this sense, the input environment is quite different than ’05; ditto the strength of the global economy now vs. then.
Quite a rally in Japan over the past six weeks. I’m happy there’s some excitement about Japanese stocks but at the same time I’m worried the hot money and sentiment will prove truly ephemeral. Institutional investors in the U.S. are mostly one-trick ponies when it comes to Japan. I discuss this in my book. Retail investors often get burned going long iShares Japan (EWJ), not exactly their fault though with the sudden swarm of Japan pundits pitching long-Japan/short-yen, all paying obligatory homage to EWJ. For the record, EWJ is not the Nikkei (N225) and though it is a convenient proxy in conversation, it is a poor one in practice.
With that being said, Japan could remain the hot trade into 2013 but it’s worth knowing what’s going on, notably with the impact of the yen. Expectations seem to be quite high (too high!?) that inflation can be created and this will somehow right Japan’s ‘doomed’ economy. I’m doubtful of manufacturing real growth with money schemes. I also don’t believe Japan’s economy is doomed. In fact my favorite stocks are mostly domestic-demand companies. Grab a copy of my book if you haven’t already. Meantime, hope you enjoy my exclusive article at Seeking Alpha: “Real numbers and thoughts behind a weak yen and Japan’s exporters.” Best wishes in 2013!
Please see my exclusive article at Seeking Alpha, “Why I’m Long Precious Metals (And Hope Others Will Continue to Buy Treasuries).” I look at some of the perils of investing in Treasuries; the performance of select assets and money growth since 1971 when president Nixon closed the gold window; and discuss my investments in iShares Silver ETF (SLV) and Vanguard’s Precious Metals and Mining fund (VGPMX).
Enzio von Pfeil, the author of Trade Myths: Globalization has left trade balances behind, is a Hong Kong-based investment advisor and he also manages his own family of funds using his Economic Clock. He is a regular contributor to Bloomberg TV and CNBC Asia. Enzio earned his Ph.D. in economics at the University of Freiburg in Germany (he studied under renowned “Austrian School” economist Friedrich von Hayek), and subsequently went into banking and garnered invaluable experience in Treasuries, currencies, and macro strategies. He later served as chief regional economist for leading London-based i-banks in Hong Kong.
As someone who has followed Enzio’s work for the past several years, I can confidently say that Trade Myths is as iconoclastic as he intended it to be and with sound reason, not to mention its critical timeliness. While Trade Myths should be required reading for everyone in government (especially in the U.S.), it is also a must-read for those in the capital markets, and it is also readily accessible, and highly suggested to, everyone in the workforce. Trade Myths weighs in at a concise 75 pages, with ten pages of charts that clearly illustrate his trade myth-busting. Below I provide a synopsis of the book and conclude with some Q&A I just had with Enzio. Before starting, I want to thank Enzio for publishing Trade Myths, which has served as a real eye opener, particularly in terms of what headline trade figures mean (or that is, what they miss), how much foreigners are really financing America, and for the various scenarios provided of what could happen if trade goes wrong.
Reuters (article in Japanese) reports that Goldman Sachs issued a report earlier this week that argues M&A will be the major theme for Japanese equities in 2010. Having a ‘macro’ investment theme for the start of each new year is a ritual for brokerages in Japan, although it seems no one ever has the resolve to action or follow through; and the M&A theme itself is not a new one. So Goldman repeats known information that Japan (equities) was overly victimized in the financial crisis and remains largely defenseless to external shocks. With ROE so low, domestic demand remaining sluggish, and overseas competition ever-intensifying, the best bet for Japanese companies is to merge and restructure. M&A/restructuring should boost top-line growth, says Goldman, which also should help margins, and therefore drive stock prices higher.
However, the longstanding problem with inward M&A is that reorganization is easier said than done (as heads, and tails in the form of non-core subsidiaries, tend not to roll in Japan), the volume of M&A has often disappointed, and the size of deals has been on the small side. Nevertheless, all of that means there is still great opportunity in Japan. The best opportunities appear to continue to be in smaller-sized deals, where there are plenty of gems, and in listed subsidiaries. Goldman is said to favor retail, machinery, services, land transport, non-bank financials, warehousing, and real estate — the underlying idea is that these industries are the most fragmented.
Bottoms-up then, as 2009 is winding down and 2010 is poised to be the year of M&A (at least thematically or in a macro sense).
No doubt David Einhorn (Greenlight Capital) is an astute investor. Recently he declared his bearish view on JGBs, which subsequently has generated heavy interest among financial and political circles. Hats off to Gwen Robinson of FT Alphaville for solid ongoing coverage of the latest JGB tale (see JGBs and the ‘end’ of the short-squeeze fest). My take is as follows:
Regardless of whether Einhorn still has his short trade on or not, the chips are stacked against him and any copycats. It’s a fat chance for opportunistic hedge funds, since JGBs, even with their paltry yields (and circumstantial concerns), have both sizable and perpetual domestic demand. As I said in my last post on this topic, in spite of subdued individual investor demand, there is always an obliged patron of JGBs (the domestic institutional investor), which in the collective can fend off any offensive.
On the surface, Japanese investors sure seem confounded, largely (and in the author’s opinion, mistakenly) shunning their own depressed equities, while settling for skeletal JGBs and feeling compelled to chase overseas trends. I used to think they were unpatriotic, in a sense, for not being buyers of domestic stocks. However, it turns out they are exceedingly patriotic given that even if they’ve lost their appetite for JGBs (in the case of individual investors), they’ll be silent holders one way or another via proxy, thanks to institutional money managers.
The Einhorn-JGB story is a reminder to Japan bears that no matter how shaky the shoji rice paper sliding doors and tatami floors appear, the pillars are quite strong and have reinforcements. As I discovered last October (’08) when the Nikkei tumbled to 1982-levels, the seemingly disastrous cross-shareholding system in Japan actually turned out to be one solid floor for equities. With the addition of timely pension fund-buying, the two effectively stopped the hemorrhaging.
So it is, Japan remains an enigma to outsiders. JGB shorts with a prerequisite nine lives. And value investors stuck in, or already having pried themselves out of, the most elusive value trap.