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Buying Japan's 2008 Story

Gregg Greenberg

Will the sun shine on Japanese stocks in 2008?

"Japan could surprise investors next year," says Alex Tedder, portfolio manager for the $2.8 billion (TWIEX - Cramer's Take - Stockpickr) American Century International Growth fund. "Pricing power, which has long been dormant, is finally returning."

Considering the Street is littered with international fund managers who have unsuccessfully tried to call the turn in Japan, Tedder's call is a relatively bold one. The popular iShares MSCI Japan Index ETF(EWJ - Cramer's Take - Stockpickr) is down 4% in 2007, once again underperforming the benchmark MSCI EAFE foreign stock index.

Tedder's fund, on the other hand, is up 15.4% year to date, and has risen 20% annually over the past three years, beating its benchmark by 50 basis points. It currently holds 15% of its assets in Japanese stocks, compared with 20% for the MSCI EAFE index. Tedder intends to increase his Japanese position, but stresses that selectivity will be the key to success.

"There is no single Japanese sector that is a screaming buy," says Tedder. "We have had great success holding Nintendo(NTDOY.PK - Cramer's Take - Stockpickr), and we believe that stock has further to go. We also think Toyota's(TM - Cramer's Take - Stockpickr)" U.S. problems are overshadowing the rest of its international business."

Like many international stock fund managers, Tedder's performance has been enhanced by the rise of foreign currencies vs. the U.S. dollar. Says Tedder. "We are not currency experts, so we do not hedge."

He may not be dabbling in the forex market, but he does have a strong opinion on the euro and its effect on European companies.

"Europe is starting to feel some pain from the strong euro," says Tedder. "German auto sellers, for example, have had a difficult time making up for the weak dollar. So with Europe slowing, and rising personal debt problems in places like Spain and Ireland, you might see euro weakness next year as well."

Tedder's top European pick is British supermarket giant Tesco, saying that "food inflation in Europe is starting to bite."

While he forecasts Japan and Europe potentially reversing course in 2008, Tedder sees strong Asian growth continuing.

"China and India are trying to put the brakes on their economies, but the growth is still phenomenal," says Tedder. "That growth dynamic is not going away anytime soon."