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Tuesday, April 9, 2013

Japan's Stocks Bull Market Almost No One Loves

NTT docomo Nakano Bldg, at Nakano-ku Tokyo Japan.
NTT docomo Nakano Bldg, at Nakano-ku Tokyo Japan. (Photo credit: Wikipedia)
By Investment U

Tokyo, Apr.8, best stock to buy .- The Tokyo market is up nearly 40% over the last six months. This is the strongest bull market in the developed world right now. Yet most American investors are missing it entirely. Don't be one of them. This is likely the beginning of a major bull market with plenty of room to run. Let me explain why and give you three great ways to play it.

Let's start with valuations. Japanese stocks are cheap. If the Nikkei 225 doubled it would still be cheaper than the S&P 500 on a price-to-book value basis.

The trend is your friend here.

For more than two decades, global investors have avoided the Japanese market since it was in a long-term downtrend. But a rally of 20% or more is deemed a genuine bull market. And, as I mentioned, this one is up 40% in the last six months alone. However, the Tokyo market could triple from here and it would still be lower than it was in 1989!

You shouldn't fight the Fed - and the same is true of Japan's central bank. The Bank of Japan is in an ultra-accommodative mode, determined to weaken the yen until Japanese inflation hits 2%. That won't be anytime soon. Japanese consumer prices are stagnant.

A weaker yen strengthens exporters, the backbone of the Japanese economy. As Japanese cars and televisions and machinery and electronics are priced cheaper overseas, sales will rise... and so will corporate profits.

Global investing giant John Templeton once said that bull markets "are born on pessimism, grown on skepticism, peak on optimism and die on euphoria."

Right now the Japanese market is still in the pessimism phase. Almost nobody - including professional investors - is putting serious money to work. Hedge fund manager George Soros is the latest to voice his incredulity about the Japanese bull market. And the average punter has no money invested here at all, even though Japan is the world's third largest economy.

If you're a contrarian, how do you play it? Here are three good ways...
The easiest and most liquid way is the iShares MSCI Japan Index (NYSE: EWJ), a broad index of Japan's leading companies. With more than $7.1 billion in assets, this exchange-traded fund is made up of many companies you already know and patronize. Top 10 holdings - which make up over a quarter of the fund - include Toyota, NTT DoCoMo, Canon, Sony, Honda and Nissan, among other well-known international brands.

EWJ also has a relatively low expense ratio (0.5%) and, like most index funds, is highly tax-efficient. You'll pick up a 1.8% dividend yield here, too.

Of course, in the early stages of a bull market, small-cap stocks tend to outperform their large-cap brethren. So consider the WisdomTree Japan SmallCap Dividend Fund (NYSE: DFJ) too. This fund reflects Japan's domestic economy with holdings in restaurants, retailers, financial firms and apparel manufacturers. The fund currently has about $192 million in net assets. The expense ratio is a reasonable 0.58%. And the current yield is 2%.

And if you prefer individual stocks, take Toyota Motors (NYSE: TM) for a spin.

After suffering from product recall problems and the earthquake and tsunami in Japan, Toyota is back on top as the world's leading automaker. The company's factories are busy cranking out popular models. And new vehicle launches will stoke demand and further bolster this year's earnings.

In short, there are plenty of good ways to take advantage of Japan's resurgent bull market. But the important question is this: Are you doing anything about it?


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