Four ways Japan disaster affects investors (Christian Science Monitor)   Leave a comment

When the world’s third-largest economy is hit with its worst earthquake ever, a tsunami, and a subsequent nuclear crisis, the human and physical toll has been enormous. The disaster is also sending ripples through the world economy. Here is a look at four ways the Japanese crisis changes the investment landscape:

– Ilana Greene, Contributor

A man looks at a stock price board in a street March 15, 2011, in Tokyo, when Japan’s Nikkei stock index nose-dived nearly 11 percent. Other Asian markets also tumbled. (Eugene Hoshiko/AP)

1. Japan’s now an opportunity

If you are already invested in Japan, analysts suggest that you hang tight. If you’re not invested, what are you waiting for? The historically cheap valuations of Japanese stocks present a compelling buying opportunity from both a crisis and secular perspective. If you are anxious about getting in too soon, remember that injecting money into the stock market actually helps the Japanese economy.

While additional price volatility is likely as Japan grapples with the tragic human losses as well as physical destruction, at some point it will begin rebuilding, which should allow the economy to rebound slowly after a decade of very little economic growth and two decades of stagnation for Japan’s equity markets.

How can you play this? Exchange-traded funds are one attractive way for investors in the United States to put their dollars to work overseas. A rule of thumb: Use ETFs that track a major index. Picking individual stocks when investing internationally is better left to sophisticated investors with knowledge of the local market.

2. But beware the short-term emotional impact

When a 6.8 magnitude earthquake hit Kobe, Japan, in January 1995, the Nikkei average fell 16 percent by the end of the first quarter and 25 percent by the end of the second. But the benchmark average had recovered all its losses by January 1996. US markets also fell briefly. The Nasdaq index had lost 2.5 percent by the end of the month, although the losses weren’t necessarily linked to the Kobe earthquake.

“The only connection to the bearish market brought by Kobe earthquake we saw in United States was the way currency markets fluctuated on that day affecting global credits which is always significant to global as well as local US business,” says Rupert McAllister, senior international credit analyst at Credit-Land.com

“What happened? I think it was the news stories, the stories of human failure, of mistakes, that the Japanese government couldn’t handle that earthquake,” Robert Shiller, professor of finance at Yale University and chief economist for MacroMarkets LLC, told CNBC last week. “It kind of created a different emotional atmosphere. It brought up reassessments of our general, basic outlook.”

The human and physical toll of the most recent earthquake and tsunami looks to be worse than Kobe’s disaster. And Japan is ill-equipped to handle the earthquake’s financial fallout: It’s effectively broke. Debt service as a percentage of tax revenues will rise to 60 percent this year (even with a low interest rates) versus 28 percent in 1995. Japan’s Prime Minister Naoto Kan has called this disaster Japan’s worst since World War II.

If 1995 is an accurate barometer, consumer sentiment will be dented in the short term, but economic growth should eventually rebound.

Sailors from the Japan Maritime Self-Defense Force load debris on a front loader driven by a US Navy equipment operator. The U.S. relief operation outstrips even last year’s effort in Haiti, with 20 ships already offshore around Japan and US forces on the mainland mobilizing to deliver aid. With estimated costs of reconstruction nearing $200 billion, Japan could be forced to sell some of its holdings in US Treasuries. That would probably increase interest rates for US consumers. (US Navy photo handout/Reuters)

3. Cleanup will be costly – for everyone

Reconstructing Japan could cost about $180 billion, or 2 to 3 percent of Japan’s annual output of goods and services as measured by gross domestic product. That represents a massive rebuilding project. How will indebted Japan finance it?

One solution is to sell foreign holdings. All told, Japan is the second-largest foreign purchaser of US Treasuries, behind China. It has effectively kept demand for US debt on the rise and American interest rates low.

Even if the Japanese decide not to sell off their holdings of US Treasuries, the government might cut back on further purchases as it focuses on its own rebuilding efforts, Dan Fuss, manager of the $18.5 billion Loomis Sayles Bond Fund, told Reuters. “A big buyer of bonds is taken out of their market. Japan will be less able to add to their reserves and less able to buy Treasuries.”

That would put upward pressure on US interest rates (including what consumers pay for credit) and inflation. The dollar would probably take a hit.

The other option, though, is for the Bank of Japan to print money to finance reconstruction. That’s not a good long-term solution for a country so mired in debt. However, in the short term, “we have reached a critical point where the disaster is so severe the BOJ will engineer liquidity mechanisms that will reduce the likelihood of forced selling in the Treasury market,” says Christian Cooper, head of US dollar derivatives trading at Jefferies & Co. in New York.

In this April 6, 2009, file photo, a liquefied natural gas (LNG) tanker arrives at a gas storage station at Sodegaura city in Chiba prefecture, east of Tokyo for the first shipment of LNG from a natural gas development project in Sakhalin, Russia. Already the world’s biggest importer of LNG, Japan will have to import more as a result of a partial shutdown of its nuclear-power facilities. (STR/AFP/Getty Images/Newscom/File)

4. Energy sector most affected, especially natural gas

Japan is the world’s largest single buyer of liquefied natural gas (LNG), accounting for 35 percent of total supply in 2009. Under the threat of a meltdown after the shutdown of the Fukushima nuclear plant, which left 1.3 million people without power, Japan will need to tap more LNG to replace the nuclear energy no longer. Asia’s second-largest economy will continue to import more of the fuel as a surrogate power source, increasing the competition for LNG.

Many projects are under way in an attempt to procure more LNG for the country’s growing demand. In Japan’s last significant earthquake, LNG purchases on the spot market spiked from 100 million tons to 500 million tons. PFC Energy predicts this latest disaster could result in increased LNG demand of 500-600 million tons per month. These numbers should be viewed with caution, as it is hard to accurately measure the extent of the damage to the nuclear facilities.

Investors interested in moving into the sector can look at companies engaged in large LNG contracts, such as Chevron (CVX) and Royal Dutch Shell ADR (RDS.A). The trend also bodes well for companies that ship liquid natural gas and the companies that build the ships. South Korea is home to the largest shipbuilding companies in the world.

Ninety percent of the gas carriers completed since 2000 were built by the three biggest Korean shipbuilders: Hyundai Heavy Industries, Samsung Heavy Industries, and Daewoo Shipbuilding and Marine Engineering. New ships cost just over $200 million each. Seoul-based Mirae Asset Securities described the earthquake as a “landmark event for the shipbuilding industry.”

 

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Posted April 2, 2011 by ilanamelissagreene in Uncategorized

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