I'm finding it difficult lately to locate attractive investments. There are still some out there, but the pickings have become noticeably slimmer over the past few months, and opportunities to scoop up quality companies such as Automatic Data Processing
After spending some time catching up on the news, economic data, and markets in Japan, though, I think I have found an exception. Three things about Japan, and potential investment opportunities in Japan, stand out to me right now:
- Economic data continues to be robust.
- The yen exchange rate is out of whack.
- Capital allocation, shareholder friendliness, and corporate governance should slowly improve.
The first two points are relatively easy to understand. Japan's GDP growth continues to be in the 2% to 4% range, but perhaps more importantly, there are very few signs of deflation left. If there is a weak spot left in the economy, it's that consumer spending hasn't picked up materially, but there is hope as disposable income continues to grow at rates not seen for almost a decade.
The weakness in the yen is also very interesting and is driven by a number of factors, including individual Japanese investors seeking out higher-yielding investments in other countries and the infamous carry trade. However, it doesn't appear that the weakness can continue, as the dollar's purchasing power in Japan compared with here at home is simply too strong. The Economist's Big Mac Index is an easy way to gauge the yen's weakness, and among developed economies, the yen is the weakest against the dollar, despite an improving economy. In the long term, the yen shouldn't get much worse, and I expect that it will appreciate, making Japanese investments slightly more attractive.
Improving capital allocation and shareholder friendliness are ultimately getting a much larger push, both from investors voting down unattractive deals and from large investors and private equity funds taking large stakes and forcing change. Japanese companies are rapidly implementing poison pills and other defenses to maintain control, but they're finding that some investors are willing to deal with proxy fights and push tender offers if companies aren't receptive to suggestions on how to improve. Japanese companies such as Hoya and DaVinci Advisors have also been willing to resort to tender offers. Ultimately, these pressures should force companies to realize that the best way to avoid a takeover is to adapt and improve returns to shareholders. This will be a long and gradual process, and there are certainly still plenty of entrenched management teams that couldn't give one whit about creating value for shareholders, so be careful, and make sure you focus on companies that generate oodles of recurring cash flow.
A few ideas to chew on
The tough part here is that most of the ADRs listed on the Nasdaq and NYSE aren't the most attractive, even if they provide ample liquidity and are the easiest to follow. Possible exceptions are Canon
The more interesting ideas are among the smaller companies. A good example is convenience-store companies in Japan. These companies have been absolutely thrashed in the past year. Some of the pain is definitely well-deserved, as markets reach their saturation points and same-store sale growth is harder to come by (if it's achieved at all). But these are still cash-generating businesses, and Lawson, Family Mart, and Circle K Sunkus, the second- through fourth-largest companies in the industry, are teaming up to reduce purchasing costs and working on being more attractive to an older demographic as Japan's population ages. All three trade at enterprise value-to-EBITDA ratios below 5, all three are flush with cash, and they're still profitable. But to get your hands on them, you'll need access to the Tokyo Stock Exchange.
Japan isn't the only market that looks attractive. Similar arguments can be made for South Korea and Thailand, and I'm sure there are attractive opportunities to be unearthed in other markets as well. There always are, if you dig hard enough and long enough to find them.
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