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 Telephone Corp.
"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 characteristics.
"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.