It’s still early days yet on the “what next” question about Japan, but as we noted on Monday, there are some intriguingly counter-intuitive lines emerging on the question of whether to ‘buy’ (or ‘sell’) Japan in the wake of the devastating March 11 earthquake and tsunami and ensuing crisis at the Fukushima nuclear power plant.
Most of them make sense. Most correctly point out that the nuclear plant crisis must be fully resolved before an investor piles into the Nikkei in earnest. But up to now, most have been missing one huge factor, the escalating scare over radioactive contamination to food and water. But we’ll return to that further down.
Warren Buffett could perhaps have put it more delicately but at least his message was clear: the March 11 earthquake and tsunami has created a “buying opportunity” in Japanese stocks, he told reporters on Monday while attending a factory-opening in South Korea.
While the Sage cancelled his planned onward trip to Japan, to visit the new facility of Tungaloy, a local company owned by Iscar Metalworking, the Israeli company he bought into some years back, he’s undoubtedly got his beady eye on Japanese stock price movements.
And, as Bloomberg reports:, he is Bullish with a capital ‘B’:
“If I owned Japanese stocks, I would certainly not be selling them because of the events of the past 10 days or so,” said Buffett, speaking to reporters in the South Korean city of Daegu, where he arrived yesterday to attend a ceremony for a new factory being built by TaeguTec Ltd. “Something out of the blue like this, an extraordinary event, really creates a buying opportunity.”
For and against
On Monday, SocGen’s Dylan Grice saying ‘buy Japan with both hands’. Now, Gavekal, the Hong Kong-based research house, has laid out some compelling arguments for and against, asking whether the catastrophe could mark the lows for the Japanese equity markets and therefore represent a “tremendous buying opportunity”, or else, whether Japan will enter into a funk similar to the one that prevailed post the 1995 Kobe earthquake and “deliver paltry returns for investors”. Fair question. Here are the (edited) arguments:
On the bullish side:
Firstly, Japanese equities are about as undervalued as they have been against their own history and other markets. Secondly, Japanese equities are under-owned by foreign investors so a wave of selling from foreign investors throwing in the towel seems unlikely. Thirdly, it is now obvious that both Japanese and G7 policymakers will promote a policy of greater easing from the Bank of Japan and a weaker yen.
Fourthly, it is becoming increasingly apparent that the nuclear crisis, while very scary… will likely have a contained direct human cost. Even Chernobyl ‘only’ triggered an immediate 50 deaths – though this level 7 event (the highest degree) is believed responsible for thousands of cancer cases in ensuing years; at this stage Japan has rated Fukushima a lower level 5 emergency (although last week international atomic agencies criticized Tokyo for possibly underestimating the scale of emergency). Finally… the parallels with Kobe make very little sense.
On the downside:
First, there is the growing perception that the Japanese government may not be as forthright as it should be with bad news….Secondly, there is the greater question of how disrupted local and global supply chains will be. Is this event more like Katrina with limited disruptions to global production, or is it more like a Lehman crisis with a collapse in global trade? Our hunch is that it is more the former than the latter but it is still early to tell. Thirdly, this exogenous shock is occurring at a time when oil and commodity prices were already high and rising; never a very positive development for Japan. Finally, the Japanese sell-off also occurred at a time when, for cyclical reasons and potentially structural reasons, global equity markets no longer seemed that attractive.
Overall, concludes Gavekal, Japanese equity markets today look much more attractive than most others. “We would thus argue that the recent sell-off in Japanese equities may be a good opportunity to reduce exposure to other equity markets, and increase Japan.”
Another sanguine view
Moody’s in a new report also takes a surprisingly sanguine view, having dealt Japan a blow with its downgrade its outlook on the country’s sovereign rating weeks before the March 11 quake.
While it warns that the downside risks from the earthquake, tsunami, and nuclear crisis have increased for Japan’s economy, sovereign credit, banking, insurance, and non-financial corporate sectors, Moody’s says its base-case assumptions “remain broadly unchanged” from a week ago:
Japan’s growth will resume in 2H2011; investor confidence will continue with regard to government bonds; the banking system will be resilient; and the worst-affected sectors will be insurance and utilities, with others experiencing a limited impact. The key assumption underlining this base case is a speedy containment of the nuclear problem..
The real problem
Strangely, none of these views, from Buffett to Moody’s, mentions the next big crisis setting in for Japan — fears over radioactive contamination of food and other products in a wide radius of the crippled nuclear plant. These fears — confirmed at the weekend with government confirmation of contamination of vegetables and milk — are likely to severely hamper the recovery of the largely agrarian economy in the ravaged northeast region.
Equally significant, they are now spooking residents in Tokyo and elsewhere, to the point where many who fled the country last week are considering abandoning Japan altogether.
Good riddance, perhaps, as several local bankers and some hold-out expats huddled in a dimly lit and empty bar on Monday night. But the implications of a more permanent exodus of foreigners from Tokyo’s financial and professional services industry could have consequences down the line. Not only that. Anxious tourists, cancelling planned travel in Japan in droves, are unlikely to come back for a good while. And that’s before we get to how the impression of a ‘Chernobyl style’ radiation scare will affect global sales of Japanese food, beverage and medical products.
But that is the subject of many analysts’ reports to come….
Related links:
Japan quake: in-depth – FT.com
Japan’s trading desks: situation normal, BAE or AFU? – FT Alphaville
Shorting Japan with ETFs - FT Alphaville
Who’s been buying Japan like crazy? – FT Alphaville