Ugly and Unloved

Article excerpt

Byline: Barton Biggs; Biggs is managing partner of Traxis Partners Hedge Fund in New York.

Japanese stocks deserve better.

It's intriguing that as Asia leads the recovery of the world economy and as its stock markets power to new highs, Japan, the biggest economy and market in Asia, languishes. If ever there was an equity market that qualified for the legendary "Four U's" (underowned, undervalued, unloved, and ugly), it's Tokyo.

The conventional wisdom of the world's investors is that Japan is a loser. Everyone knows that its politics are a farce of elderly, bungling aristocrats, that its population is aging and declining, and that its economy for two lost decades has been mired in debilitating stagnation and deflation. Twenty years ago, the Nikkei got to within a hair's breadth of 40,000. Today the index is around 9400. In February it fell to a 26-year low. Talk about a secular bear market!

So why be optimistic now? There are a number of reasons. Japan's stock market is dominated not by cheap consumer exports but by industrial-oriented export firms, many of which produce technology-intensive, precision capital equipment (these stocks have average returns three times higher than their global peers). About half of Japan's exports go to Asia, with 20 percent going to China. Asia, led by China, is by far the fastest-growing part of the world, so Japan is bound to benefit from the recovery now underway there.

In fact, Japan is already turning. Exports and the economy collapsed in the fourth quarter of 2008 and through the first quarter of this year, with real GDP falling an astounding 14 percent. Now the economy has stabilized, and, beginning in April, exports--particularly to China and the rest of Asia--have had a strong revival. The economic consensus expects real GDP growth of about 3 percent in the second half of this year. What happens next year remains to be seen, but optimism about the global economy is clearly growing, and sources report Japanese exports to the U.S. and Europe are rebounding. Nomura, the biggest investment bank and broker in Japan, is forecasting corporate profits in Japan will jump 62 percent next year, by far the biggest increase for any major market.

No one has made any money in Japan in what seems like forever. It is often dismissed as a "value trap," with stocks that seem like bargains but go nowhere. Even Nomura, which just released stock-market-performance targets for the end of 2009, has Japan gaining only 3 percent, compared with 18 percent for the rest of the world. …