Bayview Asset Management Co., a Tokyo-based hedge fund, is buying shares of smaller Japanese autoparts exporters because they are cheap and have more to gain from a weaker yen amid growing U.S. car sales.
The yen will fall to 105 against the dollar by year-end, benefiting smaller domestic partsmakers more than larger exporters that shifted production overseas, according to Ichiro Takamatsu, manager of the Japan Concentrated Small Mid Cap Fund that reported a 110 percent gain this year. A weaker yen makes goods made in Japan more cost-competitive when exported and increases the value of overseas sales when repatriated, providing a double boost to earnings.
The Topix index has surged 62 percent since mid-November as the yen weakened amid promises by Prime Minister Shinzo Abe and the Bank of Japan to spur inflation and reignite economic growth. Japanese company earnings will rise 58 percent this fiscal year, according to analysts surveyed by Bloomberg.
“Japan’s equity markets are going to be earnings-driven from here on,” said Takamatsu, who oversees 4.6 billion yen ($46 million). “Many small partsmakers still have their factories in Japan, while big final-goods makers such as Sony or Nissan have shifted production abroad. So a weaker yen will boost small-cap profits even more.”
A recovery in the U.S. auto industry will also energize earnings, Takamatsu said. Light-vehicle sales climbed 9.2 percent to 1.4 million in June, exceeding the 1.38 million average estimate of 10 analysts surveyed by Bloomberg. Total annualized sales surged last month as Americans bought new cars and trucks at the fastest rate since November 2007, according to Bloomberg data.
Takamatsu’s fund invests in no more than 20 companies, each with market value of less than 200 billion yen. He declined to name the autoparts and materials companies he’s buying.
Unipres Corp. (5949) and Calsonic Kansei Corp. (7248), both in the sector, trade at less than 10 times forecast earnings per share and are valued at less than net assets, according to data compiled by Bloomberg. Each gets more than 44 percent of sales overseas. Companies in the sector trade at a median of 11.4 times trailing earnings, compared with 14.1 times for the Topix Small Index.
The yen has fallen 24 percent against the dollar since mid-November on optimism Abe’s policies to increase government spending, boost inflation and deregulate the economy will spur growth. The BOJ has pledged to continue record monetary easing until meeting a 2 percent inflation goal, while the Federal Reserve may begin cutting asset-purchases if the U.S. economy meets projections. The yen traded at 99.64 to the dollar as of 7 p.m. yesterday in Tokyo, after breaching 103 in May.
“The currency will weaken as the yield gap between Japan and the U.S. widens,” Takamatsu said. “Some small-cap exporters were sold when the yen strengthened from late May. Now investors are looking at them again.”
Real-estate investment adviser Kenedix Inc. (4321) and J Trust Co., a financial services provider, helped drive the fund’s returns since the rally began, Takamatsu said. Kenedix surged 550 percent from mid-November to its April 10 high, while J Trust soared 256 percent to its peak on April 23. Takamatsu has sold shares of Kenedix and still holds J Trust.
The Topix Small Index, whose 1,209 members all have market capitalization of less than $2.5 billion, traded at 0.87 times book value yesterday, compared to 1.25 for the broader Topix gauge. The TSE Second Section Price Index of smaller companies trades for 0.74 times the value of net assets.
“There are so many small and mid-cap stocks trading at less than book value,” Takamatsu said. “The rally is expected to continue in the second half of the year. If you don’t buy them now, when do you buy them?”
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