Where Buffett is Going Next -- and How to Get There First

Francisco Bermea's picture

Thursday, September 24, 2009 - 12:26pm

by Francisco Bermea

Just how influential is Warren Buffett?

He was in China last week and went to a store called Dalian Dayang. Buffett told the store owner the suits were wonderful, and three days later the store's shares had risen +23%. Buffett’s endorsement should count, too, as part of Berkshire Hathaway’s original business -- textiles -- was manufacturing suit linings. Buffett has an unerring eye for quality, both when he looks at haberdashery or balance sheets. 

Companies and even countries yearn for Buffett's seal of approval. In about a year, Japan will attempt to win Buffett over. That's when the Oracle of Omaha plans to visit to the largest economy in Asia. To understand why Buffett is making the trip, we have to look back in history, to 1998.

At the University of Florida in 1998 a student asked Buffett what he thought about Japan. The Man from Omaha said he had found “very few wonderful businesses” in the country.

That was then. And the man who famously -- and profitably sat out the tech boom was wise to avoid the Land of the Rising Sun. In the eleven years since Buffett declared there weren’t any businesses worth buying, Japan’s market has lost almost -40% of its value.

Now, after a historic election, there are plenty of new opportunities in Japan. Don't wait around for Buffett to make the trip and buy every undervalued company that isn‘t nailed down. Here are the opportunities available today.

On August 30, the Democratic Party of Japan unseated the Liberal Democratic Party, which had been in power almost 54 years. New Prime Minister Yukio Hatoyama is expected to make radical changes to the economy.

For one, export-oriented companies may receive less aid from the Japanese government. It was common practice for Tokyo to give exporters favorable loans. There was an implicit quid pro quo: Many government officials would go work for those exporters once they retired from public service. The practice even has a name, "amakudari," and Hatoyama has vowed to end it.

The new administration is also more comfortable with a stronger yen and it is unlikely to intervene in any bid that would make Japan’s currency weaker. The finance minister says a strong yen will be good for the Japanese economy. While that remains to be seen, it definitely won't help exporters, because a stronger yen means it is more expensive for foreigners to purchase Japanese products.

Companies that depend on exports for most of their revenue, like Sony (NYSE: SNE), Nintendo (OTC: NTDOY.PK), Panasonic (NYSE: PC) and Toyota (NYSE: TM) will probably be stifled by the administration’s policies.

This means that exchange-traded funds that focus on large-cap Japanese stocks, like iShares MSCI Japan ETF (NYSE: EWJ) should probably be avoided. Most of its top holdings are export-oriented and likely to be hurt by the new administration’s economic policies.

Instead of focusing the nation on exports, Hatoyama wants to boost domestic spending. One proposal to stimulate domestic spending pays families $3,400 a year per child. This plan offers two advantages: It’s likely to boost consumer spending, and it also could help reverse Japan's negative population growth by providing an economic incentive to have children.

The administration has also proposed a reduction in taxes for small and medium-sized companies, as they tend to be more focused on domestic consumers.

The trend is clear. The new Japan will put an emphasis on domestic growth rather than exports. And the best -- and easiest -- way investors can take advantage of the new administration’s policies is through a Japanese fund that focuses on small-cap companies.

The iShares MSCI Japan ETF (NYSE: SCJ) tracks the performance of the a small-cap index, roughly akin to the Russell 2000 here in the United States. The fund offers instant access to a diverse array of 500 small companies that are likely to benefit from policies that seek to amp up domestic spending. The fund was introduced in December 2007 and has outperformed EWJ by about +16% since its inception.

P.S. Buffett hasn't invested in Japan yet, but he did just load up on stock from another Asian market. In fact, he loaded up on so many shares the company's CEO cut him off from buying more! Get the story here.

Francisco Bermea does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.