European equity strategists say it’s too soon to buy into stocks until more clarity becomes available on whether Japan has managed to contain earthquake- damaged nuclear reactors that threaten to leak radiation.
Japan’s biggest earthquake on record and subsequent tsunami that engulfed towns north of Tokyo on March 11 sent global stock markets reeling. The benchmark Stoxx Europe 600 Index has tumbled 4.2 percent since the temblor, sliding below its 200-day moving average, a key technical support level. The losses have dragged the gauge’s valuation to 10.7 times its companies’ estimated earnings, the cheapest since April 2009.
“The big risk to Asia and maybe even the global economy is a nuclear reactor meltdown,” said Mike Lenhoff, London-based chief strategist at Brewin Dolphin Securities Ltd., whose parent company oversees about $33 billion. “People to a certain extent can visualize what will happen after an earthquake, but the prospects of a meltdown? Who knows where that could lead.”
Lenhoff says his firm, which increased cash levels at the beginning of the month, is waiting for an opportunity to reinvest the money in what is starting to look like an “oversold” market.
“If not in the next few days, it will be something we will be talking about over the next few weeks,” he said.
European stocks extended a global selloff yesterday after two explosions and fire struck Tokyo Electric Power Co.’s Fukushima plant, raising concern a nuclear disaster is unfolding in the world’s third-largest economy. Japan’s Nikkei 225 (NKY) Stock Average climbed 5.7 percent at the 3 p.m. close in Tokyo today, the first gain in five days, amid speculation that recent declines were excessive.
Gary Baker, head of European equity strategy at BofA Merrill Lynch, said that while he’s not giving up on global growth prospects just yet, it’s too soon to start buying stocks on the dips until the flow of news starts to improve.
“It’s still wait and see,” he said from the bank’s London offices. “We first need to see containment in Japan, then Asia and then global growth. Clearly no one feels comfortable with anything remotely connected to a nuclear meltdown.”
Option prices and bets on higher equity volatility jumped from Tokyo to Frankfurt and Chicago yesterday as investors sought protection against stock-market losses. The VStoxx Index (V2X), which measures the cost of insuring against declines in the Euro Stoxx 50 Index, surged the most since November.
Amid the increased price swings, economic data have pointed to an ongoing recovery, with a report yesterday showing manufacturing in the New York region accelerated in March at the fastest rate in nine months. Karen Olney, a strategist at UBS AG, is still forecasting a 10 percent rally for equities from current levels.
“Now might be a good buying opportunity, but wait for a day or so,” she said. “A double dip in the global economy is what would make us change our forecast.”
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