Jubak Picks Japan and Germany
12/09/2005 12:00 am EST
"I'm looking for a reversal in the price gains in the US in 2006, " cautions Jim Jubak . To help hedge portfolios against that possibility he suggests taking positions export-related stocks denominated in yen and euros, hence his bullishness on Japan and Germany.
"One strategy is to buy stocks - especially those of exporters - denominated in yen and euros. These exporters will benefit in the short term as a stronger dollar makes their products cheaper in the US market. And your portfolio will benefit in the longer run if the yen or the euro appreciate against the dollar, making stocks denominated in those currencies worth more in dollars to US investors.
"I recently added iShares MSCI Japan (EWJ ASE) to my ‘Jubak’s Picks portfolio’ to pick up exposure to Japan's big exporting companies. This fund offers broad exposure to Japan's big company stocks; Toyota Motor is, at 5.2%, the largest of the fund's holdings. I think the Japanese economy is finally showing sustained growth. The Bank of Japan has raised its projections for economic growth to 2.2% for the fiscal year that ends in March 2006. Inflation, the bank now estimates, will climb 0.1% in fiscal 2006 - not much but a huge step forward for an economy that has experienced years of falling prices.
"With the dollar up 14% this year (and trading at a 25-month high) against the yen, I think the big companies in the Morgan Stanley Capital International Japan index, which this fund mirrors, will show strong export growth into 2006. And I'm looking for a kick from the dollar-yen exchange rate as the dollar goes lower to correct against the yen in 2006, when the Fed stops raising interest rates. I have a target price of $15 a share by June 2006.
"With Europe, I'd like to be a little more selective and target companies in the European Union's biggest exporting economy, Germany. To gain exposure to the German export sector, I'm adding Siemens AG (SI NYSE) to Jubak's Picks model portfolio. With this stock, investors get three trends for the price of one. First, this German exporter (power generation and medical equipment, for example) gets a competitive advantage, good until the middle of 2006 in my opinion, as a weak euro and a stronger dollar price its products more competitively for US and other dollar-denominated customers.
"Second, as the dollar's strength and the euro's weakness reverse in the end of 2006, US-based investors will pick up gains from the European currency's appreciation. And, third, the company is in the midst of a turnaround. This should result in a series of quarters in 2006 dominated by special charges but that should still drive the stock upwards as investors start to anticipate improved performance in 2007 as a result of these fixes. I have an October 2006 target price of $83 a share."
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