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Japan earthquake: Fund manager reaction

On March 11, a megathrust earthquake measuring 9.0 on the Richter scale took place at sea to the east of Japan.

A tsunami sparked by the quake hit the coast of Miyagi and Iwate prefectures, leading to massive loss of life, devastation to property and problems in the area’s nuclear reactors.

As the emergency continues to affect Japan, fund managers and economist have started to assess how it will affect the markets and the country’s wider economy.

* Shogo Maeda, head of Japanese equities at Schroders, predicts Japanese economic activity will decline in the short term, as the affected region accounts for about 7 per cent of the country’s output.

Meanwhile he notes insurance companies, manufacturers with plant in the area and Tokyo Electric Power Company, which owns the troubled nuclear reactor at Fukushima, are seeing stocks sold. Construction and housing sectors, however, continue to be “well supported”. The business sustainability of many Japanese companies, he adds, is unlikely to be severely damaged, despite the severity of the earthquake and the human tragedy which followed.

* Akira Yoshimi, manager of Melchior Japan Advantage and Melchior Selected Trust Japan Advantage funds, predicts industrial production and consumer sentiment will be adversely affected by the earthquake and tsunami, but will recover. The size and duration of this, he adds however, is uncertain and depend largely on the government’s policy reaction.

He adds the hydrogen blasts at nuclear power plants have impacted negatively on the stocks of related companies such as East JR, Tohoku Electric Power, Tokyo Electric Power, Hitachi and Toshiba.Finally he says the tragedy could cause the “gridlock” which has blightedrecent Japanese politics to be undone.

* Stephen Harker (pictured), head of Japanese equities at GLG, says the cohesive nature of Japanese society means the country will be able to cope with “the horror of this event”.
Meanwhile he says it is too soon to determine the long-term economic impact of the disaster. Finally he adds that funds with a focus on Japan will have to adapt their weightings to reflect any stock-specific threats and changing valuations.

* Hugh Young, managing director of Aberdeen Asset Management Asia, says the economic consequences are “a matter of guesswork” at this point and overshadowed by the human costs.

However, he points out that the large rebuilding projects will lead to a short-term boost for construction and infrastructure but will have a negative impact in the long run, as the used resources and money could have been better deployed elsewhere in the economy.

Looking to specific sectors, Young claims that large manufacturers with regional plants, local railway operators and retailers active in the area are likely to have seen their premises damaged and operations affected. He adds that demand for thermal coal, iron ore and commodities for reconstruction is likely to increase and create opportunities for investors.

* Steve Seneque, head of Japanese equities at Fidelity International, agrees that the short-term disruption to the country will be significant. However, he adds that many firms in the Tokyo area seem to be returning to work already and the Tokyo Stock Exchange opened this morning as usual, albeit with significant falls.

He also points out that many of the country’s industries are likely to experience “severe” problems in their supply chains, caused by disruptions to both manufacturing and transportation. On a wider scale, the disaster could damage Japan’s chances of economic recovery and delay the country’s benefiting from expected increases in global activity. But this could be eased by government spending and construction activity in response to the devastation, he concludes.

* Bill O’Neill, chief investment officer for Europe, the Middle East and Africa at Merrill Lynch Wealth Management, points out that “such natural disasters rarely leave lasting damage to the Japanese economy”, but adds the effects can be more worrying in the short term.

He notes that the Bank of Japan took steps yesterday to ensure the markets had sufficient liquidity to cope with the losses caused by the earthquake and tsunami, saying this is a welcome contrast to its reaction to the 1995 Kobe disaster.

ETF Securities adds that investors in Japan have responded to the uncertainties in the market and wider economy by dropping equities and cyclical commodities to move to gold, bonds and associated safe havens.

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Comments

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  1. Good to see two factual errors in the first (short) paragraph: earthquake intensity is not measured using the Richter scale, and it was an earthquake of 8.9 intensity (on the MMS scale).

    Good job the rest of the article is made up of quotes and not the work of the author.

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