By Conrad de Aenlle
LONG BEACH, Calif. Jan 28 The yen fell about 18
percent against the dollar last year, a drop engineered by a
Japanese government program to stimulate economic growth by
boosting exports and kick-starting inflation.
The results have been mixed: consumer prices rose but
exports declined for much of 2013, contributing to the country's
largest trade deficit on record.
Investors in Japanese stocks judged the program a rousing
success, however, sending the Nikkei 225 index up 56.7 percent.
They may be having second thoughts. The Nikkei is down 7.9
percent in 2014 through Monday, leaving it about where it was
last May, and the yen is off 3 percent on the year amid concern
that long-sought inflation may send bond yields higher, taking
the yen up with them and cutting into economic growth.
The combination of a rising yen and a deteriorating economy
may persuade investors to seek refuge in defensive sectors such
as domestically oriented providers of consumer staples and
telecommunications services. Their revenues are denominated in
yen, and demand for their products and services should be able
to withstand softening growth.
Archibald Ciganer, manager of the T. Rowe Price Japan Fund
, which ranks in the top quartile of funds focusing on
the market over the past three years, declares himself agnostic
about the yen's prospects, although he says the decline has
pretty much run its course.
"The yen is not really at a point where you can make a
high-conviction bet either way," Ciganer says. "I think we'll
stay where we are." But he adds a caveat: "If we got a growth
scare, it would strengthen."
PHONES AND DRINKS
Ciganer highlights two stocks in his portfolio that should
excel if economic weakness and a stronger yen materialize:
Suntory Beverage & Food Ltd and Nippon Telegraph and
"NTT is an obvious one because it has a high [2.9 percent]
yield and is a very stable company," Ciganer says.
Suntory has no dividend yield, but it has other defensive
"It probably has the strongest consumer brand in Japan,
period, and would not be impacted that much by a weakening
economy," Ciganer says. Suntory owns the Orangina Schweppes
Group beverage business and recently acquired the beverage
subsidiary of GlaxoSmithKline PLC, including such brands
as Ribena and Lucozade.
If the Japanese public wants to drink something stronger,
Suntory has that covered too. The company owns a number of
liquor brands and is about to pick up some more after agreeing
to acquire Beam Inc, the American maker of Jim Beam
bourbon, Courvoisier cognac and Sauza tequila, for $16 billion
in cash and assumed debt.
John Maxwell, manager of the Ivy International Core Equity
Fund, whose five-year return ranks in the top 10
percent of portfolios that focus on shares of large foreign
companies, also has exposure to Japanese imbibers through the
brewer Asahi Group Holdings Ltd, a company that
consistently beats earnings estimates.
The bulk of Asahi's business is in Japan, Maxwell adds, but
the company is expanding operations in China, a country whose
currency always seems to be rising. Its presence there "should
fortify earnings," he says.
Maxwell foresees further weakness in the yen because the
central bank's bond purchase program has been remarkably
effective. Still, he acknowledges that "we could get a scenario
where the yen stops weakening if there are credible signs that
inflation will go to 2 percent," about half a point higher than
recent levels. With such a backdrop, he says - echoing Ciganer -
"quality domestic, defensive stocks are where you'd go".
Two other examples Maxwell offers from his portfolio are
SoftBank Corp, a provider of telephone and Internet
services, and Fuji Media Holdings Inc, which owns a
television network and is also involved in landfill reclamation.
SoftBank has a lower valuation and higher return on equity
than other global mobile phone companies. It also has
significant activities in China through its 37 percent ownership
of Alibaba Group, China's largest e-commerce concern.
Fuji's landfill business appeals to Maxwell. The company
owns a plot of land in Tokyo on which the Olympic Village for
2020 and a casino are expected to be built.
Maxwell says he probably will sell Fuji if the Tokyo casino
project falls through. He will consider selling Asahi if it
stops beating earnings estimates, and signs of ebbing momentum
from Alibaba could make him question his faith in SoftBank.
He adds that if the yen bounces back he expects to find
plenty of other sell candidates.