The ongoing yen decline supports overseas acquisitions for Japan corporates
The below graph reflects the history of the Japanese yen against major currencies, to include its Asian trading partners of China and Korea. Note that Third Point made investments in Sony in late 2012—before the yen weakened and equity markets rallied. Similarly, Third Point’s disclosure of its Softbank stake of $1 billion in November 2013 might suggest that Third Point bought the Japan story at the perfect time. Softbank was trading at $30 per share at the end of 2012, though it has continually risen to $45 per share since. This article considers the impact the weakening yen could have on Third Point’s Japan-related investments.
The trend is Third Point’s friend
As the yen weakens, Japanese exporters who have significant dollar and Euro-denominated profits like Sony tend to see gains in their yen-denominated bottom line. For companies like Softbank, domestic investments such as Yahoo Japan may not see the same impact on the exchange rate–driven component of the bottom line like Sony, though Softbank’s new 80% stake in Sprint does provide the opportunity to dollar-based revenue for Softbank. Just like Third Point’s timely investment in Sony, Softbank announced its merger with Sprint on December 2012—just before the yen weakened nearly 30%. Softbank bought assets abroad (Sprint) while the yen was at its historical highest point—perfect timing for Softbank and probably for Third Point on its Softbank investment.
Sprint: Out of the red and into the black?
Should Sprint eventually succeed in a merger with T-Mobile USA and the company execute well on its global telecom initiatives, this could be a home run for both Softbank and Third Point. The risk of this investment is that the merger doesn’t occur and Softbank struggles to grow out its global telecom vision. Sprint announces earnings later in the month, on the April 29, and consensus estimates are -$0.06 per share versus the prior quarter last year of -$0.21. Perhaps black ink is on the way.
To see how the U.S. equity market rally could spill over into Asia later in the year, please see the next article in this series.
For an overview of the April 1 Bank of Japan Beige Book on Japan’s economic outlook, please see The Bank of Japan Tankan supports a 2014 Japanese equity rally.
Japan’s equity outlook
As 2014 progresses, investors could see a continued outperformance of the Wisdom Tree Japan Hedged (DXJ) and the iShares MSCI Japan ETF (EWJ) versus China’s iShares FTSE China 25 Index Fund (FXI) and Korea’s iShares MSCI South Korea Capped Index Fund (EWY). For further clarification as to why DXJ could outperform both EWJ and other Asian equity indices, please see Why Japanese ETFs outperform Chinese and Korean ETFs on “Abenomics.” Plus, as Japan pursues unprecedented monetary expansion and the U.S. Fed tapers its bond purchases, Japanese equities could also outperform broad U.S. equity indices, as reflected in the State Street Global Advisors S&P 500 SPDR (SPY), the State Street Global Advisors Dow Jones Index SPDR (DIA), and the Blackrock iShares S&P 500 Index (IVV).