Japan: The Backdoor to Emerging Markets

Japan: The Backdoor to Emerging Markets

by Steve McDonald, Investment U Contributing Editor
Friday, November 4, 2011

Who would turn down a chance to buy into emerging markets at a 75-percent discount? Not to mention in companies that have more cash than debt, are at or below book value and are at 22-year lows.

Even at today’s depressed stock prices in Europe and the United States… Japan is still a better buy.

Wilbur Ross, who possesses the rarest commodity in the markets – market wisdom – is a billionaire who specializes in distressed situations. He sees Japan as a “buy now” scenario.

In a recent CNBC interview, he stated there’s no fluff in the prices and it’s a cheap way to play emerging markets…

Can’t Bust ‘Em

The Japanese specialize in resiliency. They’re the folks who handled everything thrown at them and still came up shining.

Alexander Green, the best investor I know, thinks everything about Japan is screaming market bottom:

• Sentiment is as “black” as it can be.

• Prices are so low they’re nearly half the U.S. and Europe levels.

• The Japanese equivalent of the S&P 500 is off 75 percent from its high!

There’s virtually no premium in Japanese companies that are involved in the fastest-growing markets in the world. Most are at book value or less.

The Wall Street Journal reports that 45 percent of all Japanese companies have more cash than debt and are the most liquid in the world.

It also reported that, this year, 72 percent of all Japanese exports are going to emerging markets and 36 percent of earnings are from Japanese companies operating in emerging markets.

Remember: Japan is the third-largest economy in the world and, from a valuation standpoint, it looks a lot like the U.S. markets in March of 2009.

How to Play it

The simplest way, but not the most efficient, is the iShares MSCI Japan Index Fund (NYSE: EWJ).

As you can see, it’s well below its 200-day moving average and is at or near its 52-week low. Pre-crash levels had this at $15 to $16 per share.

Take a look at the five-year chart. This was much higher even during the tough days since its own crash in the 1990s.

Getting back to pre-crash levels will take some time, but at current valuations, a run to $11 or $12 is very doable.

The only problem, this type of ETF usually has underperforming stocks along with the high fliers. In a situation like this, where even the best companies are selling at or below book value, it may be worth your effort to cherry pick the portfolio for the three or five best companies, or ones that more accurately fit your risk profile.

How to Cherry Pick EWJ

Go to iShares.com and search EWJ. This will give you a complete list of the entire EWJ portfolio. The top listings and the percentage of the portfolio are right below.

Most are recognizable names, and if you’ll do a little digging, you can find those with the best earnings projections, greatest exposure to emerging markets and the ones that are in the lower end of their trading range.

Take a look at the whole portfolio to get into the lesser known companies with the best prospects. Most have ADRs, so you can buy them on the U.S. exchanges, but for some you may have to go to foreign exchanges to purchase. This, by the way, is getting easier to do as more U.S. brokerages allow their customers to buy directly on foreign exchanges.

Whether it’s the ETF or the individual stocks, make sure you don’t miss this one.

It isn’t often you have the chance to buy the third-largest economy in the world at a 75-percent discount, and get companies at book value that are churning out huge numbers in the fastest-growing economies in the world – the emerging markets.

It may be a backdoor to these markets, but it doesn’t matter how you get in, as long as you’re in.

Good investing,

Steve McDonald

Article by Investment U