A week has now passed since Japan was hit by the tragic earthquake and subsequent tsunamis, and we’ve all been watching the commentary with equal measures of horror and sympathy for those affected.
Meanwhile with the clean-up operations are ongoing, financial markets continue to assess the impact on the Japanese and global economies in both the short and long terms.
· Damage to the infrastructure – power and roads – may delay the reconstruction process, but the knee-jerk post-quake sell-off seems to have run its course.
· Expect a short term rebound in equity markets, particularly if no further bad news on the nuclear front emerges.
· But keep an eye on the Middle East.
The volatility of these markets over the past week is in itself testament to the total lack of consensus. After plunging 16% in the first two days, short covering and hope that the worst of the crisis was over resulted in the Nikkei-225 Index rebounding 5.7% on Wednesday before sinking again on Thursday as worries grew over the possibility of a major nuclear catastrophe at the damaged Fukushima nuclear power plant.
While the Nikkei was plunging, the yen was heading in the opposite direction. During the week the yen rose over 5%, hitting a post WW2 high vs. the US dollar. This was widely attributed to Japanese institutions, including insurers liquidating their overseas positions and repatriating the proceeds. However, there is anecdotal evidence that hedge funds, anticipating just such an eventuality, have played an equal part in pushing the yen higher. However, concerted central bank and G-7 intervention on Friday has seen much of these gains reversed, possibly at the unlamented expense of said hedge funds.
The volatility has not been limited to Japan-related assets. Equity markets globally have sold off to varying degrees. The S&P 500 fell 3.6% through Thursday and European markets were off by rather more. Ironically, Asian and emerging markets fared a little better, down on average 1-2%. Korea (which also happens to be one of the largest components of the MSCI Emerging Markets Index) actually rose during the week as that country’s industrial base was seen to benefit from the disruptions to production in Japan.
Oil prices fell on expectations that demand from Japan would decline (although they subsequently rebounded as investors refocused on the still worrying situation in the Middle East). Slightly counter-intuitively, gold (the ultimate hedge assets) also fell slightly, albeit from a lofty position. Again, hedge funds are suspects.
Much of the movements of the last week have been knee-jerk, and not based in any meaningful manner on the real impact on the economy or businesses. There will be winners and losers to emerge from the tragedy. Into the former category will fall construction companies and developers, while insurers and
The nuclear accident has greatly added to the confusion. Tune in to any of the 24-hour news stations and you will hear yet another instant “expert” expounding on the likely outcome – whether it be minor inconvenience or Armageddon. The only conclusion to be drawn is that nobody, and this would appear to include the operators of the facility itself, and the Japanese government, has much of an idea.
We shall not add to the general level of noise on this subject except to observe that it is this lack of information, exacerbated by warnings from governments of other countries for their nationals to leave, that continues to weigh on markets.
That said, and provided that the nuclear situation does not take another dramatic turn for the worse, we would expect rationality to return to markets and there are signs that this is beginning to happen. As we have said before, Japan is a generally underheld market by foreign investors. Many are weighting on the sidelines for signs of stability. When this returns, a sharp rebound will follow, with commensurate knock-on effects elsewhere.
This earthquake has pushed the other major geopolitical news of the moment, the uprisings in the Middle East, off the front pages. Again, it is close to impossible to know how the situation will resolve itself. Embattled Libyan leader Colonel Gaddafi seems to be close to recapturing his country, but the recent UN Security Council resolution authorising the robust imposition of a no-fly zone may yet change this dynamic, possibly leading to further instability. Meanwhile, the unrest in Bahrain rumbles on and the introduction of troops from foreign countries cannot be viewed entirely positively.
Since the start of the month, global equity markets have fallen over 5%. However, a combination of an underweight position in Japan and a diversified asset base has seen our client portfolios fall by a lesser 1-3% or so (to Thursday’s close). Part of these losses will have been clawed back by the any additional rally in equity markets.
There are three options open to investors at present:
(1) Sell,
(2) Buy,
(3) Sit tight.
On the first, the only reason to lighten up in the current circumstances is if there is a likelihood of re-entry at substantially lower levels. Except in the worst possible scenario, we think that this will be difficult, whilst timing the entry correctly will be an almost impossible act of divination.
On the second, it is clear that some markets have been hit hard, with Japan (obviously leading the way). There is good value to be had there, although given the rapidly fluctuating news cycle this is a tactic to be adopted by only those who are happy to look to the long term and who are therefore able to stomach the shorter-term volatility.
For most of us, therefore, the default advice will be to sit tight for now and wait for further clarity to emerge: we may miss the early snap back on any good news, but at the same time we won’t get our heads bitten off on any lurch downwards.
If you wish to obtain an updated valuation of your portfolio, please contact us and we would be happy to provide one.
The Javeline-mail: steve.davies@javelinwealth.com
contact: +65 65577185
website: http://www.javelinwealth.com
Javelin Wealth Management supports www.kiva.org, the global microfinance philanthropy initiative, and the Central Asia Institute (see www.ikat.org).
