Global Stock Rally May Withstand Japan Disaster as Economic Growth Tops
Stocks in Japan extended losses as trading resumed though the worst earthquake on record in the third-biggest economy is unlikely to dent the two-year bull market in global equities.
The Nikkei 225 (NKY) Stock Average dropped 6.2 percent, the most since December 2008, to 9,620.49 today. The Standard & Poor’s 500 Index retreated 0.6 percent at 4 p.m. in New York. Lost production from the Tohoku region where the 8.9-magnitude quake struck might not be enough to spur a recession, Bank of America Corp. said. The Bank of Japan said it will pump a record 12 trillion yen ($146 billion) into the financial system.
“The purely economic consequences will be modest: some reconstruction, some more government spending,” said Charles de Vaulx, a manager at New York-based International Value Advisers LLC, where he co-manages the $1.8 billion IVA International Fund including Japanese stock. “No major international consequences, either, except maybe helping drive long-term rates higher. We do not expect to make any significant changes to our portfolio as a result of this tragedy.”
The fastest global economic growth since 2007 and record U.S. profits that helped spur the 94 percent rally in the MSCI All-Country World Index of 45 nations should be intact, investors said. While the quake adds to concerns such as violence in Libya and Europe’s debt crisis, shares may benefit from reduced inflation expectations as damage to oil refineries curbs demand for crude.
The temblor and subsequent tsunami may have killed 10,000 people in Miyagi prefecture north of Tokyo, national broadcaster NHK reported, citing local police. The official toll reached 1,833 at 4 p.m. Tokyo time, with 2,369 missing and 1,898 injured, the National Police Agency said.
Workers battled to prevent a nuclear meltdown after a second blast rocked an atomic plant north of Tokyo. No large release of radiation was detected after the explosion, which didn’t breach Fukushima power station’s No. 3 reactor and followed a build-up of hydrogen gas, Chief Cabinet Secretary Yukio Edano told reporters in Tokyo today. The risk of a large leak is very small, he said.
“It will be very difficult to handicap and assess a worst- case nuclear disaster scenario,” said Stephen Wood, the New York-based chief market strategist for Russell Investments, which manages $155 billion. “It would be a completely independent analysis because we don’t have any historical data for such a situation. We would have to go back to the table and start over.”
The MSCI All-Country World Index slipped 0.7 percent today while the iShares MSCI Japan exchange-traded fund dropped 7 percent in U.S. trading today.
“Our view on Japan is still the same,” said David Herro, chief investment officer of international equities at Harris Associates, which oversees $65 billion in Chicago. “When you look at the valuation of Japanese companies, if you look at what’s happening with Japanese managements in terms of improving operating efficiency, we’re still excited about the Japanese equity market.”
Global stocks ended little changed on March 11 as declines of 0.7 percent or more in China, Hong Kong and Australia were offset by a 0.7 percent advance in the Standard & Poor’s 500 Index. The MSCI All-Country gauge rose less than 0.1 percent to 336.73. U.S. shares were boosted by a 1.5 percent drop in oil spurred by speculation the temblor would curb demand in the world’s third-biggest oil-consuming country.
“If this causes market values to go substantially lower, we’ll use this as an opportunity to buy quality at lower price,” Herro said. “Very little of this will ultimately impact the long-term price of the companies we own.”
Investors are trying to assess whether the quake will hurt Japan’s economy enough to derail worldwide growth spurred by more than $12 trillion pumped into the financial system by governments and central banks since 2008. Global gross domestic product is forecast to expand 4.4 percent this year and 4.5 percent in 2012, according to the Washington-based International Monetary Fund.
Japan accounted for $5.4 trillion, or 8.7 percent, of world GDP in 2010, when the global economy expanded by 5 percent, the fastest pace since 2007, the IMF said. Japan may expand 1.5 percent this year, the fifth-worst rate among the world’s 24 developed nations, according to the IMF’s World Economic Outlook from October.
Equity bulls are counting on record U.S. earnings. Profit for S&P 500 companies will total $96.68 a share this year, according to the average analyst estimate in a Bloomberg survey.
A 17 percent increase in crude futures trading in New York since Feb. 18 has helped push the S&P 500 down 3.5 percent from its 32-month high of 1,343.01, data compiled by Bloomberg show. The oil contract retreated March 11 after a storage-tank fire shut Cosmo Oil Co.’s 220,000 barrel-a-day refinery in Chiba, outside Tokyo, and JX Nippon Oil & Energy Corp. closed refineries in Sendai, Kashima and Negishi.
“Japan is one of the largest economies in the world, so right now it may ease some of the global inflationary pressures because it lowers the demand for oil and materials,” said Patrick Legland, the Paris-based global head of research and strategy at Societe Generale (GLE) SA, which oversees about $300 billion.
The earthquake is the latest shock to an economy that has the fastest-aging population in the developed world and has been mired in deflation for much of the past two decades. The Nikkei 225 has fallen 74 percent since December 1989 as land prices tumbled to about half their peak levels in the late 1980s. The country’s real GDP grew at an average 0.8 percent pace in the past 10 years, compared with 1.7 percent in the U.S.
The benchmark index for Japanese stocks lost 3 percent last year as the yen at its strongest annual average level against the dollar since at least 1971 dimmed the outlook for export earnings. The country depends on demand from China and the U.S., the destination for 35 percent of Japanese shipments.
Japan avoided an economic contraction following the 1995 Kobe earthquake that killed more than 6,000 people because factories from outside the affected region were able to offset lost production, according to a March 11 research note from Masayuki Kichikawa and Setsuko Yamashita, economists at Bank of America in Tokyo. Extra supply capacity may limit the quake’s drag on GDP to as little as 0.2 percentage points, they wrote.
“If you look at the history of earthquakes, they rarely cause permanent downturns in an economy and often the rebuilding efforts give rise to renewed economic activity,” said Komal Sri-Kumar, who helps manage $116 billion as chief global strategist at TCW Group Inc. in Los Angeles. “My expectation is that we’re talking about one or two quarters of downturn in Japan and no long-term impact. If the market goes down significantly, it’s an opportunity to buy.”
The ruling Democratic Party of Japan has few options to offset growth that is lost to the quake. The Ministry of Finance projected in January that government debt will rise 5.8 percent to a record 997.7 trillion yen in the year starting April 1.
Bank of Japan interest rates are near zero and the country’s borrowing costs are the lowest in the developed world. Government bonds maturing in 10 years yield 1.27 percent, while the yen has depreciated against 12 of the 16 most-traded currencies this year, dropping 4.8 percent versus the euro and 0.9 percent against the dollar.
Japan’s economy shrank more than the government initially estimated in the fourth quarter because of a downward revision to capital investment and consumer spending. Moody’s Investors Service lowered its outlook on Japan’s Aa2 debt rating last month on concern about the government’s ability to tackle the world’s biggest public-debt burden.
“The big problem in Japan is that the government has been trying to stimulate the economy for so long that it doesn’t have a lot of gunpowder left,” said Tim Hartzell, who oversees $300 million as chief investment officer for Houston-based Sequent Asset Management, which invests in Japanese stocks through exchange-traded funds. “Japan hasn’t had any economic growth for years, and there’s no domestic demand.”
Wood, steel and construction companies may benefit from rebuilding in Japan, said Peter Sorrentino, who helps oversee $14.4 billion at Huntington Asset Advisors in Cincinnati.
Weyerhaeuser, Plum Creek
Weyerhaeuser Co. (WY), a Federal Way, Washington-based owner of timberland, rallied 6.2 percent to $24.38 in the U.S. on March 11 for the biggest rally since July 12. Seattle-based Plum Creek Timber Co. rose 2.4 percent, the most since Dec. 1, to $41.52.
American depositary receipts of Pohang, South Korea-based steelmaker Posco (005490) advanced 2.1 percent. Komatsu Ltd. (6301)’s ADRs climbed 0.3 percent to $30.75 after the shares fell 2.3 percent in Japan. It is the world’s second-largest maker of construction equipment. Peoria, Illinois-based Caterpillar Inc., Komatsu’s competitor, added 1.7 percent to $100.02.
“It was very specific infrastructure-type companies that people suddenly said, ‘Wait a minute, these guys will benefit,’” Sorrentino said.
Fukuda Corp. (1899), Ueki Corp. (1867), and PS Mitsubishi Construction Co., all of which are construction companies based in Japan, surged in the final minutes of trading on March 11 as the quake drove the Nikkei 225 down 1.7 percent.
Fukuda rose 30 percent, the most among 1,666 stocks in the Topix, to 213 yen. The Niigata City-based construction company jumped 52 percent in the two days following a magnitude 6.4 quake in October 2004 and rallied 20 percent in a single session after a 6.8-magnitude temblor in July 2007, according to data compiled by Bloomberg and Wolfram Alpha LLC.
Ueki, a general contractor in Kashiwazaki, soared 23 percent to 165 yen for the second-largest gain in the Topix on March 11. PS Mitsubishi, a Tokyo-based maker of concrete, jumped 18 percent to 298 yen.
The Nikkei 225 has lost 5.6 percent since its 2011 peak on Feb. 21 through March 11. The index’s gain since the bottom in global stocks 24 months ago is 45 percent, versus a 95 percent advance in the MSCI All-Country World Index, data compiled by Bloomberg show.
“People may move away from risk assets and fly to bonds in the short term,” said Tomomi Yamashita, an analyst at Shinkin Asset Management Co., which oversees about $6 billion, on March 11. “This doesn’t mean Japan’s economy itself will break down. With earthquakes, things go back to normal after a few months. So investors’ risk aversion will probably only last for a short while.”
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