How to Play the Fastest-Growing G-7 Nation

When it comes to the global economy, are you more of a glass-half-full or glass-half-empty investor?

If you're on the cautious side, you have good company because the International Monetary Fund issued a pretty bearish forecast this week for the global economy.

The IMF just released its semi-annual global growth forecast and it lowered both its 2013 and 2014 expectations. The IMF now expects global economic growth of 3.1% in 2013 and 3.8% in 2014. That's a 0.2% decrease from the previous IMF forecast made just three months ago in its World Economic Outlook.

The reason for the lowered expectations is that the IMF sees weaker economic growth across the board ... but especially in emerging markets.

"Growth almost everywhere is a bit weaker that we forecast in April, and the downward revision is particularly noticeable in emerging markets," said chief economist Olivier Blanchard in a statement.

Just How Much is the IMF
Scaling Back its Projections?

  • The Chinese economy will grow by 7.8% in 2013 and 7.7% in 2014, down from 8.1% and 8.3%.
  • Brazil will grow 2.5% in 2013 and 3.2% in 2014, down from 3.0% and 4.0%.
  • Russia's growth projections were lowered to 2.5% and 3.3%, from 3.4% and 3.8%.

Among the IMF's biggest worries are the faster-than-expected slowdown in China and the likelihood that the Federal Reserve Bank will soon taper its QE bond-buying.

Not surprisingly, then ...

The IMF Isn't Too Enthusiastic About
Most Developed Markets, Either

It warns that the 17-member euro zone is "still struggling" and that the recession will get even worse, shrinking by 0.6% in 2013 -- 0.1% worse than previously expected.

The U.S. is in the same slowing boat and the IMF cuts its forecast by 0.2% to 1.7% for 2013.

That may sound pretty negative across the board, but there was one, lone bright star: Japan

Under Prime Minister Shinzo Abe, Japan has unleashed a massive quantitative-easing program and is trying every economic trick in the book to jump-start its morbid economy ... and it is working.

"Abenomics has been stronger than expected," the IMF's Blanchard said at a press conference.

So strong, in fact, that the IMF upped its 2013 forecast for Japan to 2% this year, 0.4% higher from April.

Why the Land of the Rising Sun
Is the IMF's Lone Bright Star

The reason for the optimism is the massive slide in the Japanese yen, which makes Japanese exports more-affordable for foreign buyers.

The main Japanese newspaper, The Nikkei, reported that a one-yen change in the dollar/yen rate would translate into a $2.7 BILLION increase in profits for the 30 largest Japanese exporters.

The yen was trading in the 70-per-dollar range in 2012 but is now in the 100-yen-per-dollar range. Do that math; if The Nikkei is right, this 30-yen drop translates into an additional $80 billion of profits!

At this revised economic-growth rate, Japan is on track to outpace its fellow G-7 brethren. Suddenly, Japanese stocks — exporters in particular — are looking extremely attractive, and I expect them to take off.

If you want to add some Japanese exposure to your portfolio, there are several ETFs to choose from.

  • iShares Japan Small Cap Index (SCJ)
  • iShares S&P/Topix 150 (ITF)
  • SPDR Russell/Nomura PRIME Japan (JPP)
  • SPDR Russell/Nomura Small Cap Japan (JSC)
  • WisdomTree Global Ex-U.S. Growth (DNL)
  • WisdomTree Japan SmallCap Dividend (DFJ)
  • WisdomTree Japan Hedged Equity Fund (DXJ)

And if you are REALLY bullish about Japan, there is a leveraged ETF that is designed to deliver double the return — both up and down — of the main Japanese stock market index: the ProShares Ultra MSCI Japan Index (EZJ).

There are also a handful of Japanese stocks that are traded on the NYSE and Nasdaq, such as Canon (CAJ), Honda (HMC), Kubota (KUB), Panasonic (PC) and Toyota (TM) to name a few.

I'm not suggesting that you rush out and buy any of these stocks or ETFs tomorrow morning. As always, timing is everything so I recommend that you wait for my buy signal.

However, Japan's prospects are very positive and I expect Japanese equities to move higher and should be at the top of your buy list.

Best wishes


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Posted 07-12-2013 11:34 AM by Tony Sagami
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