One note of caution: In a materials based industry such as Toyota’s, this short-term stimulative effect is often negated in the long term by increasing raw material prices for future product cycles. Remember that currency fluctuations not only effect the price of products sold in different countries, but also materials acquired from overseas as well.
Honda Motor Co Ltd (ADR) (NYSE:HMC) is another Japanese automaker that stands to benefit — but not as much as you might think. While Honda is still Japan’s No. 2 exporter, production of Honda Motor Co Ltd (ADR) (NYSE:HMC) vehicles in overseas markets has increased over the years. Thus, the weakening Yen may not have quite as significant an effect on Honda Motor Co Ltd (ADR) (NYSE:HMC) as it will for Toyota. This suggests to me that while Toyota may be the short-term beneficiary, it will also pay the greater price over the long term, and that Honda Motor Co Ltd (ADR) (NYSE:HMC) may be the safer long-term play.
Number Five Is Alive
Japans No. 5 exporter is also its largest electronics company, thanks in large part to a component business that includes semiconductor manufacturing. I’m sure many of you might be surprised that the honor goes to Panasonic Corporation (ADR) (NYSE:PC), not Sony Corporation (ADR) (NYSE:SNE). Panasonic also includes the popular brands Sanyo and Technics. Under its various divisions, this company manufactures numerous products such as phones, televisions, appliances, cameras, and even power tools.
While Sony Corporation (ADR) (NYSE:SNE) does come in as the No. 6 exporter out of Japan, it does approximately 50% of its manufacturing abroad. So like Honda, Sony Corporation (ADR) (NYSE:SNE) could be a safer long-term investment when the negative effects of the yen’s devaluation begin to manifest.
Looking at a recent three-month chart (Figure 2), it’s obvious that expectations regarding the potential for export increases have caused both stocks to outperform vs. the Japanese ETF.
Figure 2:
This illustrates the significant effects that currency adjustments can have on stocks that are heavily influenced by exchange rates. Also, it is noteworthy that in all of these cases, individual stocks have outperformed the Japanese ETF significantly. ETFs have both good and bad qualities worth keeping in mind.
Foolish Conclusion:
Knowing how currency markets work can make you some easy money. They play a large role in the success or failure of companies that do business abroad. By learning the simple rules that govern the floating exchange market, and paying attention to global monetary shifts, you can find very profitable investments.
The article How Currency Exchange Rates Will Impact These Stocks originally appeared on Fool.com and is written by James Catlin.
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