Worst Disaster Since WWII – JAPAN
Posted by OptimaxGlobalVenture at March 18th, 2011
Following a 9.0 magnitude earthquake which rocked Japan’s North Eastern region last Friday, a nuclear emergency ensued as cooling systems for several reactors in Fukushima failed to work, heightening the risk of a nuclear plant meltdown. At the time of writing, work is still continuing on the Fukushima I nuclear power plant, while the area surrounding the plant has been evacuated. Our hearts go out to the people of Japan, as they attempt a recovery from what Japan’s Prime Minister has called the country’s worst crisis since World War II.
Following the earthquake on 11 March 2011, the Nikkei 225 benchmark index closed 1.7% lower on the same day, but slumped precipitously on the subsequent two trading days, falling 6.2% and 10.6% on 14 March and 15 March respectively. This was the worst two-day decline for Japanese stocks since 1987, and came as a result of fears over a nuclear catastrophe. Global stock markets were not spared either, as they recorded losses of between 0.2% and 3.3% on 15 March 2011.
In terms of the stock market reaction, our initial thoughts on the latest series of stock market declines (most notably for the Japanese stock market) are that price movements have been fueled by an overwhelming sense of uncertainty, especially since the disaster deals with an extremely controversial topic of a potential nuclear catastrophe. The stock market sell-off was particularly severe and broad-based on 15 March, as the Japanese Prime Minister’s live video comments on the situation at Fukushima served to exacerbate fears over the ongoing nuclear emergency in Japan. The relatively muted global stock market reaction over the first two days of the disaster suggests that the stock market had taken the Sendai earthquake largely in its stride, but the potential nuclear catastrophe remains the main sticking point which worries investors.
We do not deny that there will be near-term headwinds for many businesses which depend on Japan for trade and operations. The earthquake and rebuilding process also has many implications (both positive and negative) for various sectors, and Japan’s contribution to overall global growth will likely diminish in the current quarter and even in the next. Nevertheless, even as analysts scramble to identify the next “beneficiary” or “loser”, we view many of these themes or concerns as rather short-term in nature. Taking a step back from the frenzy and uncertainty, we do not identify any permanent impairment to the Japanese economy as a result of the earthquake and as in the case of earthquakes of the past, we have no doubt that the Japanese economy will find its footing as it rebuilds from the current disaster. We do not foresee any major impairment for the global economy, and this latest event does not serve to change our view on the attractiveness of stock markets on the whole. If anything, markets selling off in a wild panic provide cheaper entry points for investors, making them even more attractive.