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Investment Opportunities

Three Reasons to Invest in Japan Now

Three Reasons to Invest in Japan Now

by Louis Basenese, Investment U’s Small Cap and Special Situations Expert
Thursday, March 17, 2011: Issue #1471

As the fallout from the devastating Japanese earthquake and tsunami continues, it’s little surprise that the country’s Nikkei 225 stock exchange has endured a rough week.

Since last Friday’s close, the index has fallen by 12.6%, with the crisis reverberating through other global markets.

Few people know exactly how long it will take Japan to recover and rebuild, nor the full impact of the destruction in the world’s third-largest economy. But let me boil it down for you:

  • If you’re a long-term investor, invest in Japan.
  • If you’re a short-term trader, on the other hand, you’ll want to avoid three areas.

Here’s the story…

Three Reasons to Invest in Japan Over the Long Term

Let’s deal with the upside for investing in Japan first. And there are three parts to it…

  • Japan is Cheap: Even before the earthquake hit, Japan was one of the world’s cheapest markets. For example, the average stock on the TOPIX trades at a price-to-book ratio of 1.0 – a 56% discount to the average U.S. stock.
  • Decisive Central Bank: The Bank of Japan has moved swiftly to pump extra liquidity into the Japanese market – nearly $700 billion to date, to be exact. This sends the global markets a clear message – that the bank will take aggressive measures to offset any true financial panic.
  • Japanese Resilience: The resilience of the Japanese people will kick in with a vengeance, as rebuilding efforts get underway in earnest. There’s a precedent for this, too. With the Kobe quake in 1995 as our guide, any dip in industrial output promises to be short-lived. In fact, it should last less than a couple of months, based on the chart below from Societe Generale.

Japan's industrial production post-earthquake

Chart courtesy of Business Insider & Societe Generale

Add it all up and any significant downside risk for the broad Japanese market simply doesn’t exist. All the bad news is reflected in current prices.

That’s the long-term angle, now on to the short term…

If You’re a Short-Term Trader, Beware of These Three Areas

In the short term, however, expect volatility to be the norm for these areas of the markets, not entirely isolated to Japan:

  • Uranium

The meltdown at the Japanese nuclear sites currently ranks as a four on the nuclear disaster scale, compared to a seven for Chernobyl.

But this is obviously a very volatile situation that could change dramatically – and for now, perception is reality. In the wake of the disaster, many people don’t consider nuclear power safe any more. And as a result, uranium stocks are getting clobbered, selling off by double-digit margins.

If the nuclear impact worsens, or human emotion grabs hold of energy policy, watch out. Trading in uranium miners like Paladin Energy (Toronto: PDN.TO), Cameco Corp. (NYSE: CCJ) and Denison Mines Corp. (AMEX: DNN), among others, promises to be extremely volatile.

  • Insurance Stocks

Moody’s Investors Service Inc. and Fitch Rating expect losses to rank among the largest in history for insurance and reinsurance companies worldwide.

At this stage, though, the total cost remains a complete unknown. And that makes insurance stocks with sizeable Japanese exposure extremely vulnerable. Names here include Prudential Financial (NYSE: PRU) and Manulife Financial (NYSE: MFC). Unless you like terrible odds, don’t touch these stocks.

Also consider avoiding Aflac (NYSE: AFL). Although it’s not exposed to the property and casualty market, it generates 70% of its profits from medical and life insurance in Japan. The impact on such markets could be delayed.

  • Emerging Markets

In our globalized world, you can bet that Japan’s tragedy is going to take an economic toll on other countries, particularly emerging markets in the region.

For example, over 200,000 Filipinos work in Japan and regularly send money home. Thailand relies on one million Japanese visitors each year to generate significant tourism revenue. And countries like Indonesia regularly rely on Japan for investment in infrastructure projects.

That money could obviously now be redirected to reconstruction efforts. Even China’s economy isn’t immune, as Japan ranks as the third-largest destination for Chinese exports.

In the end, investors always tend to sell first and ask questions later. If you’re a long-term investor, such behavior spells opportunity in Japan. On the other hand, if you’re a short-term trader, such behavior could result in quick losses. Invest accordingly.

Ahead of the tape,

Louis Basenese

Editor’s Note: This article was originally called “Buy Japan… But Beware of These Three Investment Shocks” and was published on Wall Street Daily – a new publication featuring Chief Investment Strategist Louis Basenese. The Wall Street Daily mission is simple: To expose the whole truth and real stories behind the economic and investment headlines, challenge conventional “wisdom” and show you how to profit amid the noise (or worse, outright lies) from analysts, politicians, pundits and brokers.


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