The planned monetary base expansion by the Bank of Japan (doubling in size between 2012 and 2015) would lead to higher inflation and GDP growth rates into mid 2015. Despite the recent correction, these actions should push Japanese equities forward to the detriment of US and European competitors. I believe that the correction in the yen is only around half complete. Hence, the depreciation will likely run substantially further than many analysts consider possible. As a matter of fact, I see the yen trading at 120 per US dollar by mid-2014. Besides, those reflationary pressures should benefit domestic insurers, real estate stocks and exporters. Here I propose three long equity ideas.
A Japanese real estate play
DAITO TRUST CONSTRUC (OTCMKTS:DITFY)’s shares should go higher not only because real estate has always been a good inflation hedge; the company’s earnings growth prospects and undervaluation should also help.
Over the long term, DAITO TRUST CONSTRUC (OTCMKTS:DITFY) can differentiate itself by taking advantage of increasing demand for estate tax liability mitigation for seniors due to the aging society. As a matter of fact, I consider this to be the main driver of Daito’s performance going forward.
Despite the high foreign ownership of shares (+55%), demographic awareness should push domestic investors to invest in DAITO TRUST CONSTRUC (OTCMKTS:DITFY) Trust more aggressively. With a return on equity at above 30% and a reasonable expected dividend yield (4%), DAITO TRUST CONSTRUC (OTCMKTS:DITFY) Trust’s robust business model makes it a good long-term investment idea.
A no-brainer idea
Of course the no-brainer idea is Toyota Motor Corporation (ADR) (NYSE:TM). The company is a huge exporter to the US (US dollar revenues) and produces a big amount of its cars in Japan (costs in yen). The company, up by over 25% year-to-date, is still trading at a reasonable level (12 times earnings).
I anticipate profits reaching new highs amid yen weakness and growth in consolidated shipment volume. Moreover, Toyota Motor Corporation (ADR) (NYSE:TM) has a global production capacity of 9.5 million units (Toyota and Lexus combined) which leaves room for higher utilization. On top of all this, Toyota Motor Corporation (ADR) (NYSE:TM)’s net cash in the automotive segment is close to the company’s target, which raises the likelihood of substantial dividend increases (Toyota’s cash dividend yield stand at 1.5%).