Contrarian Investing in 2012: How to Buy Great Global Assets Really Cheap

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club

Contrarian Investing in 2012

Japanese companies have a problem. Several of them, in fact.

Their nation’s fiscal situation, in many ways, is worse than that of Greece or Spain. (Debt as a percentage of GDP, for example, is more than 225%.) The Japanese economy is growing at an anemic 1% – and has been for decades. To top things off, the country’s population is not just aging, but dying off. That means less demand for everything from sushi to golf clubs to industrial equipment.

So what are Japanese companies doing about it? They’re diversifying outside their national border, buying up companies at fire-sale prices around the globe. And that’s creating an opportunity for investors like you.

For example, last week Japanese trading house Marubeni Corp. agreed to buy U.S. grain handles Gavilon Group LLC in a deal worth about $5.6 billion. Japan Tobacco Inc. offered to buy Belgian tobacco maker Gryson NV for $600 million. And Takeda Pharmaceutical said it would acquire a Brazilian drug maker for $246 million.

These aren’t isolated examples. With more than $34 billion in foreign investment this year, Japan is likely to exceed last year’s record $84 billion, a total that propelled the country to the number three spot in global deal rankings.

What’s going on here? After decades of frugality and debt-slashing following the 1980s asset bubble, Japanese firms are flush with cash, more than $2.6 trillion. That’s even more than U.S. corporations’ record $2.2 trillion in cash.

But aside from this treasure chest, the Japanese have a surging yen that gives them increased purchasing power around the world. With limited opportunities for growth at home, tons of cash and an appreciated currency, Japanese companies are in the midst of the biggest boom in overseas investment the country has ever seen.

But hold on… didn’t this end badly for the Japanese in the 1980s when they bought up trophy properties like Universal Studios, Rockefeller Center and the Pebble Beach Golf Course? Indeed, it did. Many of those purchases were both too rich and ill timed. But recent deals are taking place against a starkly different backdrop.

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In previous mergers and acquisitions, Japanese companies often failed to do thorough due diligence or bargain hard enough. But not any more. M&A specialists routinely report that Japanese firms are executing deals quickly, efficiently and effectively. Unlike before, they aren’t reluctant to bargain hunt at auctions or make a hostile bid if friendly takeover offers are rebuffed.

Japanese firms are busy buying gas, oil and mining projects around the globe as global corporations struggle to lock up natural resources and get more control over operations. Japanese retailers are buying foreign firms to capture new markets. For example, toy maker Tomy Co. paid $640 million last year to buy the U.S. maker of Thomas the Tank Engine railroad sets. (They didn’t have much choice with birth rates went down sharply in Japan.) And Japanese drug maker Astellas recently paid $4 billion for OSI Pharmaceuticals in the United States.

What does this mean for you as an investor? Plenty. You now have the opportunity to buy dirt-cheap, cash-rich Japanese companies that are, in turn, buying up depressed and undervalued assets around the globe.

The easiest and most liquid way to play this is to invest in iShares Japan (NYSE: EWJ), a broad index of Japan’s leading companies.

Only contrarians need apply, however. Japan is cheap because the market is almost completely out of favor. The fund hit a 52-week low Friday.

Good Investing,

Alexander Green

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