Buying Into Japanese And German Exporters

Buying Into Japanese And German Exporters

Buying Into Japanese And German Exporters
With the euro down nearly 15% this year and at​ a​ two-year low against the U.S .​
dollar, the world’s largest exporting nation is​ worth a​ good look .​
So is​ another country that has thriving exports in​ spite of​ a​ stronger currency .​
We’re talking about Japan and Germany, respectively, the world’s second- and third-largest economies .​
The top lines at​ leading German industrial companies are rolling in​ with impressive numbers for an​ almost zero-growth economy .​
Quarterly sales at​ Siemens rose 13%, the fastest since 2018 .​
BMW’s sales rose by 11% in​ the third quarter, although high raw-material costs and pricing pressure resulted in​ weak net profits .​
a​ bright spot is​ Asia, where BMW expects to​ sell 150,000 cars per year by 2018 .​
Overall, German exports are up for the third-straight month and sales to​ countries outside of​ the European Union rose 18% annually from a​ year earlier .​
Clearly, the Germans are good at​ making stuff and selling it​ to​ the world, and the weaker euro is​ helping spur growth .​
Germany’s DAX stock index is​ taking notice and is​ up nearly 20% year-to-date .​
Meanwhile, U.S .​
exports are up a​ paltry 2% since 2000 .​
Although exports to​ China are up 35% during this same period, Americans are now buying seven times more from China than we are selling to​ them .​
a​ good reason why is​ that, according to​ research by Morgan Stanley's Stephen Roach, consumer spending represents 71% of​ America’s gross domestic product .​
The figure is​ 42% for China and 55% for Japan .​
Speaking of​ Japan, the aftermath of​ the financial bubble has obscured the fact that it​ too, remains an​ exporting powerhouse, despite a​ currency that has risen more than 20% since 2018 and 13% this year alone .​
Just look at​ Japan’s current account surpluses over the past three years: $113 billion in​ 2018, $136 billion in​ 2018 and $172 billion in​ 2018 .​
China is​ a​ major market, and despite political difficulties, bilateral trade between China and Japan now exceeds trade between Japan and America .​
A majority of​ Japan’s exports are manufactured goods and components .​
Fifty percent of​ its exports to​ China in​ 2018 were electrical equipment and machinery, and its top exports to​ the world include autos, electronic components, optical instruments, imaging equipment and computer parts .​
Much is​ made over China’s huge trade imbalance with America, which reached $126 billion in​ the first eight months of​ this year .​
No doubt a​ sizable share of​ Chinese exports to​ America are chock full of​ Japanese components .​
While some of​ these components were made in​ offshore facilities, many were made in​ Japan, which has been able to​ hold on to​ its industrial base better than America .​
How do they do it? First, the Japanese are continually moving up the value-added curve and are careful to​ keep the R&D and manufacturing of​ sophisticated components close to​ home, while outsourcing the low-end to​ low-wage countries .​
Secondly, even though China’s wages are about 5% of​ Japan’s, factory automation has lessened the importance of​ labor costs .​
For advanced high tech products, it​ accounts for only 10% to​ 15% of​ total costs .​
Having manufacturing closer to​ home also shortens new product lead times and increases cooperation between R&D and production teams leading to​ a​ crucial edge in​ staying ahead of​ its nimble competitors .​
Supply lines of​ 2,000 miles can be problematic .​
Perhaps most important, there is​ the critical issue of​ protecting intellectual capital .​
Having research, development and production closer to​ headquarters better protects proprietary technologies .​
Canon, Sharp, Hitachi, NEC and Toyota are all good plays on Japan’s manufacturing edge, while Sony will continue to​ lag until it​ boosts its R&D and catches up in​ product development .​
The iShares MSCI Japan Index exchange-trade fund is​ an​ attractive option, since it​ has about 50% exposure to​ Japan’s manufacturing sector with an​ annual expense ratio of​ only 0.59% .​
Similarly in​ Germany, the iShares MSCI Germany Index is​ loaded with that country’s top exporters and would be an​ excellent proxy for overall German export growth.

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