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Japan Valuations at Four-Month Low Lure AMP Following Slump

March 15 (Bloomberg) -- The biggest decline in Japanese stocks in two years pushed valuations below levels in November, when a 19 percent rally began, luring investors who say equities will prove bargains as the country rebuilds from its largest earthquake on record.

AMP Capital Investors Ltd., which oversees about $98 billion in Sydney, raised its Japan rating to “overweight” from “neutral” yesterday after the Topix Index’s 7.5 percent tumble made its price equal to its net asset value, said strategist Nader Naeimi. Polar Capital Holdings Plc’s Japan Fund, which beat more than 85 percent of peers since 2006, bought steel and construction companies, manager James Salter said.

Buyers are betting yesterday’s selloff that erased $285 billion of share value is an overreaction and that a record 15 trillion yen ($183 billion) injection by the Bank of Japan will stabilize the market. That’s wishful thinking, according to Mizuho Asset Management Co. and Pengana Capital Ltd., who say it’s a mistake to act before damage from the 8.9-magnitude quake is assessed.

“If there are no further aftershocks, I believe that in six months, you’ll turn around and find that this was a great opportunity to buy,” said Salter, head of Japan for Polar Capital, which manages $4 billion in London. “We’ve got stocks in our portfolio that are down 20 percent. Some of the reactions, I think, have been completely crazy.”

Worst Since 1987

The Topix plunged 9.5 percent to 766.73 today, for the biggest two-day retreat since the 1987 stock market crash.

Purchasing stocks in the index in January 1995 after the 6.9-magnitude earthquake that killed more than 6,000 people in Kobe, Japan, produced losses of 21 percent over five months. The index rebounded to finish the year 4.4 percent higher than its close on Jan. 13, the last trading session before the temblor. Companies in the index collectively traded at 2.2 times book value at the end of 1995, data compiled by Bloomberg show.

Valuations aren’t always reliable after catastrophes, said Bruce McCain, who oversees $25 billion as chief investment strategist at the private-banking unit of KeyCorp in Cleveland. Book value, or assets minus liabilities, may change depending on damage to factories, while analysts’ forecasts for earnings are subject to revision.

Margin of Error

“Even as it looks like there won’t be a lasting damage to the economy, you don’t know the extent of the disaster in Japan and how much that will affect their companies,” he said. “Investors are going to price in an extra margin of error with respect to valuation of the Japanese companies.”

The March 11 quake and subsequent tsunami shut manufacturing plants at companies from Sony Corp. to Toyota Motor Corp., sent more than 350,000 people to emergency shelters and may have killed 10,000 in Miyagi prefecture north of Tokyo, according to company statements and police estimates. The Nikkei 225 Stock Average lost 6.2 percent to 9,620.49 yesterday, the biggest drop since December 2008 and 17th-biggest slump ever.

The Nikkei Stock Average Volatility Index, a measure of Japanese options prices, jumped 74 percent to 40.72 yesterday for the biggest gain since records began in January 2001, according to data compiled by Bloomberg. The gauge, which has doubled since last week, showed traders expect a 12 percent swing in the Nikkei 225 in the next 30 days.

Avoiding a Meltdown

Tokyo Electric Power Co., Asia’s biggest power generator battling to avoid a meltdown at its Fukushima nuclear plant, plummeted 24 percent yesterday. Japan’s three largest carmakers said thousands of new vehicles were damaged, sending Toyota and Nissan Motor Co. down more than 7.9 percent.

The containment chamber of the No 2 reactor at Tokyo Electric Power’s Fukushima Dai-Ichi nuclear plant may be damaged after today’s blast and radiation leakage is possible, company spokesman Kaoru Yoshida said. The level of radiation at the plant rose above the legal limit after the latest explosion, Kyodo News reported.

“I just wouldn’t jump in now,” said Barry James, who oversees $2.5 billion as president of James Investment Research Inc. in Xenia, Ohio. “There will be an opportunity, but I don’t know when that is. I’m not a nuclear scientist, but in case of a serious disaster all bets are off.”

Restoring Power

The Nikkei 225 will likely gain 7.1 percent from yesterday’s close to 10,300 in the next month as power is restored to homes and businesses and factories resume production, said Shoji Hirakawa, a Japanese equity strategist at UBS AG. Tokyo Electric canceled the first blackout in a scheduled rotation, saying it has enough power to meet demand, public broadcaster NHK reported.

Masahiko Ejiri at Mizuho Asset Management said the five-month retreat following the Kobe earthquake suggests that Japanese equities may extend losses. Concern about how the country, which has the highest public debt level in the world, will pay for reconstruction may restrain gains, he said.

“There is still room for downside,” said Ejiri, a fund manager at Mizuho Asset Management, which oversees about $41 billion in Tokyo. “We have the earthquake, the nuclear issue, and in addition a turmoil of economic activity in the Tokyo area. Combine those three factors, I don’t see any positive in the short term.”

Insurance Claims

Insurers and reinsurers may face claims of 1.2 trillion yen to 2.8 trillion yen tied to the Japanese earthquake, according to a preliminary estimate from catastrophe modeler AIR Worldwide. Insurance stocks in the Topix plunged 13 percent as a group yesterday for the biggest decline among 33 industries, data compiled by Bloomberg show.

Trading of bearish Nikkei 225 options jumped to a record 414,506 contracts yesterday, according to data compiled by Bloomberg.

“It’s still too early to add to Japan,” said Diane Lin, a fund manager at Pengana Capital, which oversees $1 billion in Sydney. “The market might have underestimated the economic impact from Japan to the region.”

Japan’s economy was showing signs of a rebound before the quake, after shrinking an annualized 1.3 percent in the fourth quarter. Machinery orders in January rose more than economists estimated and had the biggest jump in five months, the Cabinet Office said on March 9.

The Bank of Japan doubled its asset-purchase program to 10 trillion yen yesterday, an increase that’s about one-tenth the size of the U.S. Federal Reserve’s Treasuries-buying effort. The central bank also deployed 15 trillion yen in emergency funds, its biggest one-day operation.

“I haven’t seen many days like this,” said Salter of Polar Capital. “Out of this grows opportunities. In six months, I’d be surprised if the market is not at least 5 percent higher from where it is now.”

To contact the reporter on this story: Lynn Thomasson in Hong Kong at

To contact the editor responsible for this story: Nick Gentle at

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