By Ron Harui
Feb. 9 (Bloomberg) -- Daiwa SB Investments Ltd. is urging clients to put their money into Brazil, Mexico and Turkey after the yen’s 55 percent gain against their currencies made emerging markets a bargain. A year ago, it wasn’t recommending any developing nation funds.
“A lot of assets have gotten extremely cheap and Japanese investors are looking to park their money somewhere,” said Kenichiro Ikezawa, who oversees about $3 billion as a fund manager at the second-largest brokerage in Tokyo. “Emerging markets including Brazil, Mexico and Turkey look attractive. We would like to invest more in such countries.”
After a year when the yen rallied against 177 currencies, Japan’s biggest money managers say the best is over in the foreign exchange market. The nation’s investors bought 940 billion yen ($10.3 billion) more international stocks and bonds than they sold in the five days to Jan. 31, the seventh week of net purchases, according to the Ministry of Finance.
Japanese companies are also taking advantage of the strengthening currency, spending record amounts on mergers and acquisitions outside the country. The total value of overseas takeovers more than tripled to $76.8 billion last year, according to data compiled by Bloomberg.
The yen rallied 60 percent against the Brazilian real, 55 percent versus the Mexican peso, and 62 percent against the Turkish lira in 2008 as the global economic slump led investors to pull billions of dollars out of emerging-market assets to repay low-cost loans funded in Japan’s currency.
‘Wave’ of Selling
Now, traders expect a turnaround. The yen may fall 18 percent this year to as low as 112 against the dollar from 91.47 today as domestic investors find bargains outside the country, said Akio Shimizu, chief manager of foreign-exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., an arm of Japan’s largest publicly listed lender. His target is weaker than the median forecast for a 6 percent decline to 98 by year-end, according to a Bloomberg News survey of 48 analysts.
“A wave of yen-selling orders is starting to hit the market,” Shimizu said. “Banks are stepping up the amount of investment trusts focused on overseas assets.”
Mizuho Asset Management Co. wants to increase holdings of dollar-, euro- and Australian dollar-denominated sovereign debt, said Akira Takei, who helps oversee the equivalent of $42.5 billion as head of non-yen bonds at the unit of Japan’s second- largest bank in Tokyo.
“Foreign yields look attractive right now,” Takei said. “There are still some risks, so I’d rather stick with sovereign bonds. The yen may decline to 112 versus the dollar this year. I certainly don’t expect the dollar to plummet.”
The dollar weakened the most in two decades last year.
‘Doing Better’
The strategy is similar to the so-called carry trade, where investors borrow in countries with low rates and invest in nations with higher borrowing costs.
The carry trade dominated foreign exchange markets in 2005 and 2006 as declining volatility and rising risk appetites spurred investors to sell yen and buy Australian and New Zealand dollars as well as South African rand and Brazilian reais.
Japan’s target rate is 0.1 percent. An expansion of the carry trade helped push the yen down 13 percent in 2005 versus the U.S. dollar. The collapse of credit markets and almost $1.1 trillion of losses and writedowns at the world’s biggest financial companies triggered a flight from higher-yielding assets last year, when the yen strengthened 23 percent.
Total Return
Emerging-market assets are appealing to Japanese because those nations suffered only a fraction of the credit-market losses that pushed the U.S., euro region and Japan into recession. In a Jan. 28 report, the International Monetary Fund said while the global economy is likely to shrink 0.5 percent this year, emerging markets will grow an average of 3.4 percent.
“Emerging countries still have the impression of doing better relative to the developed world,” said Kimihiko Tomita, head of foreign exchange in Tokyo at State Street Bank & Trust Co., a unit of the world’s largest money manager for institutions. “Japanese investment trusts and individuals are still interested in emerging markets.”
Brazil is one of the favorites because its benchmark interest rate is 12.75 percent, Tomita said. It takes only 40.52 yen to buy a Brazilian real, down from 69.67 yen as recently as Aug. 6. The country’s interest rate is the highest in the world, accounting for inflation, even after the central bank cut borrowing costs last month for the first time since September.
Foreign Investment
The world’s 10th-largest economy received a record $45.1 billion in foreign direct investment last year, including $8.1 billion in December, more than twice the forecast in a Bloomberg survey of 13 economists.
Japanese investors may earn a 25 percent total return this year on Brazil’s local-currency bonds, should the median forecast for the yen in a Bloomberg survey of analysts prove accurate. Anyone who bought the country’s 10 percent notes due January 2014 at the start of the year would gain 13 percent from the yield on the securities. Yen-based buyers would get another 12 percent from currency appreciation, based on the forecast for 44.34 yen to the real by year-end.
That same bet would have resulted in a loss of 24 percent in 2008.
Emerging-market bonds offer the best way to gain from the yen’s strength, said Hideo Shimomura, who helps oversee the equivalent of $44.3 billion as chief fund manager at Mitsubishi UFJ Asset Management Co., a unit of Japan’s largest bank.
Extra Yield
The extra yield investors demand to own bonds of developing nations instead of Treasuries was at 6.40 percentage points today, up from 1.46 percentage points in the first half of 2007, according to JPMorgan Chase & Co.
“Sovereign bonds in the Middle East, South America, South Africa, and Turkey are popular,” Tokyo-based Shimomura said, forecasting yen may fall as low as 100 to the dollar this year. “Brazil, for example, has relatively sound fundamentals and is likely to keep luring funds pretty easily.”
The yen’s five-month advance versus the dollar leaves more room for appreciation, and emerging-assets will get even cheaper as the global recession deepens, said Jun Fukashiro, a senior fund manager at Toyota Asset Management Co. in Tokyo, who helps oversee about $10 billion in assets.
“We want to wait on investments in emerging markets,” Fukashiro said. “Foreign bonds are attractive given that the global economy is still deteriorating but this isn’t a time to aggressively get into emerging-market debt.”
Growth Slumps
Mexico’s economy will shrink 1.2 percent this year, according to the average forecast of 31 economists surveyed by the central bank Jan. 20-29. Brazil’s growth will slow to 2 percent, the weakest since 2003, a central bank survey published Jan. 26 found. Latin America’s gross domestic product will contract 0.5 percent, JPMorgan said in a report Feb. 4.
The MSCI Emerging Markets Index is down 1 percent this year, after slumping 54 percent in 2008, its biggest annual decline in at least two decades.
“We think it is unlikely that the Japanese will be rushing into overseas markets any time soon,” a team of analysts at Citigroup Inc. wrote in a note to clients on Feb. 5. “The risk- reward of overseas investment is not what it once was. Interest- rate differentials are closing fast and foreign-exchange volatility remains high.”
Acquisitions Surge
Japanese companies are increasing their overseas investments as the stronger yen boosts their purchasing power.
International acquisitions by Japanese firms climbed to $76.8 billion last year from $23.1 billion in 2007, beating the previous record of $57.1 billion set in 2006, according to data compiled by Bloomberg. The figures include debt assumed in the purchases.
Nomura Holdings Inc., the nation’s largest brokerage, bought the non-American businesses of Lehman Brothers Holdings Inc. in October after the U.S. investment bank collapsed the previous month. Tokyo-based Nomura said the purchase would cost $2 billion. Asahi Breweries Ltd., Japan’s top-selling beermaker, spent $667 million buying a majority stake in China’s Tsingtao Brewery Co. in January, after the Tokyo-based brewer purchased the Australian beverage operations of Cadbury Plc for 550 million pounds ($811 million) in December.
Last month, Tokyo drugmaker Astellas Pharma Inc. made a $1 billion bid for Palo Alto, California-based CV Therapeutics Inc., adding to the $9.2 billion Japanese firms spent buying U.S. pharmaceutical and biotech companies last year.
“If companies can secure enough funding, the appreciation of the yen gives them a good chance of exploring business opportunities outside Japan,” said Toshiro Yanagiya, Tokyo- based general manager of securities business division at Aozora Bank Ltd. “We are likely to see plenty more such deals in the year ahead.”
To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net.
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