Japan has a new partner in Asia – here’s how you could profit

Over the weekend I went to watch the new mega Hong Kong movie The Last Tycoon. The film is set in the Shanghai gangster era of the early 1900s and closely follows the rise and fall of a real-life gangster. It’s a sort of Shanghai version of The Godfather. Except with a lot more hack and slash street brawls and outrageous explosions. Check it out if you get the chance – you can view the trailer here.

The thing is that one thing disturbed me about this film. There seemed to be an awful amount of anti-Japanese rhetoric. And the director seemed determined to make the gangsters appear feverously nationalistic. This, as you know, is a sensitive time for relations between China and Japan.

Thousands of angry protestors took to the streets across China in the autumn of last year in a dispute over the East China islands. Protests became violent and were directed at Japanese companies. A 10,000-strong mob swarmed the Japanese embassy in Beijing hurling rocks and bottles. One group of protesters roared “Flatten Tokyo, destroy Japan!”

The truth is, these two countries rely on each other to a huge extent. China was Japan’s largest trading partner last year, and Japan is China’s second-biggest trading partner after the United States. Japan is also China’s largest outside investor, with Japanese companies directly or indirectly employing about ten million Chinese workers.

Enter the Southeast Asian nations…

But something is happening now that could radically reduce Japanese reliance on China.

Earlier this week, I learnt that the newly appointed Japanese prime minister Shinzo Abe is to follow President Obama and embark on a trip to Southeast Asia. Abe is to visit Indonesia, Thailand and Vietnam on his maiden overseas trip – all in an effort to forge stronger trade links between these countries.

When the leaders of the first and third largest economies of the world are courting the Association of Southeast Asian Nations (Asean) and its ten member countries, 600 million population and close to $2.5trn combined economy, we can be pretty sure that the grouping will play a pivotal role in the New World. 

That’s why I’ve been urging as many people as I can to invest in this story in recent months. I believe there is serious money to be made in Southeast Asia over the next year. And today I want to share with you what I believe to be a simple way to profit from this.

It involves a Thai industrial estate company with a strong presence in Vietnam. I’ll tell you all about how I see this exciting story being played out. But let’s start by looking at how Japan could spur investment in Southeast Asia…

Japan could have a huge impact in Southeast Asia

Since opening to the West in 1868, Japan has pursued an industrialisation and independence strategy that has made it both admired and feared in Asia.

In 1905, Japan won a sea-based war against Russia, the first time in modern times an Asian country had been able to beat a Western power. That acted as a clarion call for aspiring business and political leaders that came to dominate Asia over the next 60 years.

Japan expanded its empire under the ‘The Greater East Asia Co-Prosperity Sphere’ policy during WWII, which meant it treated Asian countries – particularly China – with disdain and cruelty in order to enhance its economic interests. 

After being defeated by the Allies in 1945, Japan lost most of its Asian dominions and focused on rebuilding its economy. A number of reforms were implemented in Japan by the Supreme Command of Allied Powers, giving more power to a parliamentary system. There was also strong move to encourage a free market capitalist system.

The success was phenomenal to the extent even that the US and the West feared they would be overtaken. So in 1985, the ‘Plaza Accord’ was concluded which was an agreement between the governments of France, West Germany, Japan, the United States, and the United Kingdom to depreciate the dollar in relation to the Japanese yen and German mark by intervening in currency markets. The dollar-yen exchange rate declined by 51% from 1985 to 1987.

Japan responded by outsourcing part of its production and manufacturing, particularly to low-cost countries in Southeast Asia. It resulted in a tsunami of investments and transfer of technology and know-how.

Not least for China. Trade between the two nations has tripled since 2000 to more than $300bn, according to Bloomberg. So why is Shinzo Abe so determined to forge links with Southeast Asia?

This feud could prove a major boon for Southeast Asia

The territorial brawl between China and Japan over the East China islands has seen the relationship between the two countries reach a modern day low. And it is a serious threat to the Japanese economy.

Today, Chinese consumers continue to boycott Japanese products over the islands in the dispute. Sales of Japanese cars in China have yet to recover and Chinese factories began to favour South Korean component suppliers, according to Bloomberg. The US has even displaced China as Japan’s largest export market. The fallout from the dispute may have cut Japan’s growth in the latest quarter by about one percentage point, JP Morgan estimated.

The truth is that Japan is heavily dependent on China for exports. And it badly needs to reach out to the fast growing economies in Southeast Asia. That’s why Abe is visiting this region on his maiden voyage as Japanese premier. The stated aim of the trip to Indonesia, Thailand and Vietnam is “to deepen ties with Asean not only economically but also in the fields of energy and security.”

Asean offers Japan several benefits. For instance, labour is mostly cheaper and less likely to go on strike or cause troubles (unlike in China). The Southeast Asian nations also have well-established distribution and manufacturing facilities.

And for the most part, they hold the Japanese in high regard – Japanese products are still ‘no 1′ for most ordinary people and many governments are running Japanese scholarship programmes for their best and brightest students. Finally, Asean offers a gateway to untapped markets such as the Mekong region, the hinterland of Indonesia and the aspiring urban middle-class across this fast developing region.

Some groundwork has already been done. Earlier this month, Japanese finance minister, Taro Aso, visited Myanmar to support Japanese investment in a market where China has a strong presence. In December, the leaders of Myanmar and Thailand invited Japan to be the third investor in the $56bn Daiwei development project, a deep-sea water project off the shores of Myanmar.

Moreover, the foreign minister, Fumio Kishida, has just completed a visit to the Philippines, Singapore, Brunei and Australia.

It is worth highlighting that Brunei, Malaysia, the Philippines and Vietnam are opposing China’s claim to large parts of the South China Sea, including rich fishing grounds, important shipping lanes and areas that could potentially yield large oil and natural gas reserves.

Amata – a likely winner

I expect Japan to broaden its investment across Asean, supporting our thesis that the rise of Southeast Asia is one of the great investment stories of our time.

But how can you invest in this story?

One option is to buy Amata Corporation (Bangkok: AMATA) which develops industrial estates primarily for manufacturing plants and factories. It also acquires land and develops essential infrastructure and facilities ready for industrialised operations. Amata also has overseas investments in Vietnam.

The stock trades on a current price/earnings (p/e) ratio of 16.3x, price to earnings growth (PEG) of 0.68x and a dividend yield of 2.6% according to Bloomberg. But earnings in 2013 should jump sharply thanks to acceleration in growth of foreign direct investments in Thailand, large exposure to Japanese car makers (70% of revenues) and a Vietnamese subsidiary with huge potential to capitalise on improved macro economic outlook.

Here at The New World, I believe we are in the minority. We are searching for investment opportunities that cannot be found in the mainstream media. Over the years I have got myself into a few sticky situations to find these stories – negotiating riots, collapsing economies and the odd physical threat or two. But it was worth it. 

Because I believe there is one big story here – the rise of Southeast Asia – that could deliver the most lucrative investments you can make this year. In fact I think this could be the greatest stock market opportunity of the next ten years. And I don’t say that lightly.

I’ve been living out here in Malaysia for years. And I’ve watched these economies slowly emerge from a devastating crisis – banding together to form a formidable new economic power.

This article is taken from The New World, MoneyWeek’s FREE regular email of investment ideas and news from Asia and Latin America. Sign up to The New World here.

3 Responses

  1. 15/01/2013, JL wrote

    Amata sounds great, but how does one buy shares in the Thai market? Any advice on that, Lars. HK, Singapore no problem but unsure about Thai.
    Many thanks.

  2. 16/01/2013, Derek S wrote

    What about those not confident enough to invest directly in shares? Is there a region based ETF worth looking at?

  3. 16/01/2013, Jeff wrote

    Thailand was one of the best performing markets in the world last year.

    I’m not convinced this year will be the same.

Commenting on this article closed

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