4 ways to play Japan’s rebound

March 25, 2011

People walk past a display showing stock indices in Tokyo March 23, 2011.  REUTERS/Lee Jae-WonIf you’re an investor, how should you regard the Japanese crisis? Should you be shorting Japanese stocks? Should you bet heavily on Korean companies to pick up the slack? What about American-based companies like Apple and Hewlett-Packard that are dependent upon the Japanese supply chain?

There are no clear-cut answers as supply chains are often as complex as the products whose parts depend on them. You need to look beyond Japan and the current headlines to explore a number of scenarios.

Japan will be hurt in the short-term. Although eventually Japanese engineers and crisis planners will get things moving again, in the interim the island nation is short of electricity. Unlike oil and other commodities, they can’t easily pipe in more electrons from a ship or plane. A weakened grid means lower or no productivity in factories and brownouts in office buildings. Parts are not being shipped out for everything from cellphones to autos.

Other than the radiation problem from the damaged reactors, lack of power is the most immediate threat to the industrial sector. If you’re really bearish on Japanese industry rebounding quickly, you can bet against their stocks by buying an inverse exchange-traded fund (ETF) like the ProShares Ultrashort MSCI Japan fund. The fund promises up to a 200-percent daily return on an index of Japanese stocks — if the benchmark drops. This is a high-risk way of “shorting” Japan and is only for disciplined traders.

Japan will rebound. I’d lean more toward this scenario, although the exact timing is anyone’s guess. Some companies will be impacted more than others. Unless you know how their supply chains work, it would be difficult to sort out the winners and losers. If you’re generally optimistic about the country, you can go “long” and buy an ETF such as the iShares MSCI Japan Index. Just keep in mind it will be tough going. As BMO Capital Markets notes: “Power disruptions could create shortages of technology and machinery, creating isolate pricing pressures.”

Asia is still a good bet. As it rebuilds, Japan will lean heavily on its neighbors China, South Korea, the Philippines, Vietnam and India. Will the Japanese do significant offshoring of manufacturing? They will certainly need to buy parts and commodities in their recovery phase. Overall, Asia is a good growth investment, anyway. The Vanguard MSCI Pacific ETF invests in nearly 500 stocks in Asia plus Australia and New Zealand. If you still want Asian stocks, but want to leave out Japan, consider the iShares Asia ex-Japan fund.

Invest in the whole world. If you just want to stop worrying about which country or countries will do well, expand your holdings to most of the world’s stock markets. It makes sense for any buy-and-hold portfolio and eliminates much of the guesswork. One of my favorite choices is the Vanguard Total World Stock ETF, which tracks almost 3,000 stocks  in the FTSE All-World Index.

I would be the last one to bet against the Japanese. They are compassionate, resourceful, know how to pull together and are great engineers. They will rebound from one of the greatest disasters since 1945.

To be fair to the Japan bears, though, there’s still much that troubles that economy. It’s been growth-challenged for more than a decade, can still send some huge ripples through the global economy and is sitting on more than $1 trillion in U.S. debt. They may cash in some U.S. Treasury paper, which could rock global credit markets.

While I don’t think Japan’s rebuilding will trigger an economic disaster, it’s something worth watching closely. No one knows how this will play out and you still need to keep an eye on your investment horizon.

2 comments

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I count about 609 words in this article and yet nothing of value was written. Thanks for wasting my time.

Posted by thatsawinner | Report as abusive

Is the title of this article a hidden clue regarding GE’s PRISM reactor? That technology is exactly what is needed to deal with the issue of spent nuclear fuel. I am making the optimistic assumption that the US government now has increased incentive to establish something that slightly resembles a long-term energy policy with respect to nuclear power.

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