We were looking for danger in all the wrong places. It was not the Middle East, with its perpetual rumblings from the oil fuelled war planet Mars, but the Far East and its nuclear energy that have knocked stock markets flying.
After the many messages of outrage I received over my remarks about Gaddafi a couple of weeks ago, I will tread more carefully through the ruins of north eastern Japan. I am conscious, as we all are, of the toll of misery inflicted on that coastline.
However, this is an investment column so I will leave others to convey the human story. Please do not think I am unfeeling. The effects of the tsunami and the nuclear power station meltdown are the biggest factors affecting the stock market and cannot be ignored.
There is always a chance of utterly unforeseen events ripping up the investment scenario. That is one of the risks of investment and the reason why you should not invest more than you can comfortably afford to lose. However, you cannot invest on the basis that disaster is lurking round the next corner, otherwise you would never invest. It is all about risks and rewards.
The biggest surprise was that the tsunami did not hit the stock market all that hard initially. Although Japanese stocks understandably tumbled immediately, the reaction in London was one of delayed shock. Forecasts of a 2% fall in the Footsie when the market opened on Monday proved premature. The real deluge came on Tuesday and Wednesday.
The brutal truth is this area of Japan was not important economically. Thus the hope was that Japan would bounce back because, as one newspaper said, ‘it always does’.
This was a rather dubious analysis. Japan, though still one of the world’s largest economies, is not the powerhouse it was before the emergence of the Asian tigers. Its economy has been in the doldrums for 10 years, its population is aging and debt lies heavily on its government.
The rationing of electricity, with the lights going out on monuments and tourist sights in Tokyo, brought home the reality to Western investors.
After spending January and February discussing how far above 6,000 the Footsie could go, pundits are now pondering six consecutive days of falls, which is quite a rare event. Thursday brought some respite, suggesting that the selling had been overdone, but the persistent headlines and images of a stricken nuclear power station continue to sap confidence.
Nonetheless, stock markets seem to have done their worst and it is possible to think that the Footsie has a floor at 5,600 points, lower than we hoped a couple of weeks ago but higher than we might well have expected after the turmoil in North Africa/Middle East and Japan.
I talked this week to Andrew Beal, director of Asian equities at Henderson Global Investors. I regard his views on the Far East economies as second to none.
He said: ‘After a major short term effect there will be a snapback in activity once the crisis passes. The impact on GDP will be greater than Kobe (the earthquake in 1995 that caused a 21% fall in Japanese stocks) but we are dealing with a less economically important region. If in the next few days the reactors are brought under control I expect a financial stimulus to bring a sharp pickup in GDP.’
He believes that the impact on the rest of the region will be relatively minor: ‘None of this is going to affect the competitive landscape on a long term basis. History tells us that the impact of these events is always transitory. There’s always someone out there with capacity to supply demand. The world hasn’t been relying on Japanese growth for the past decade.’
One other point he made was on the issue of nuclear reactors. As we all know, there is considerable opposition to this form of energy and the Fukushima disaster has come just as nuclear was being touted as a green (that is, non-fossil fuel) energy source. If the spread of nuclear power plants is halted there will be a knock-on effect on oil and gas prices.
Knee jerk reactions bring windfall gains to those who move fastest but, as Beal pointed out, they are often the best way to lose a lot of money. Investors who sold out in panic while the Footsie was below 5,700 may find themselves buying back in at a higher price.
I chose not to sell any of my holdings. They have all fallen in price this week but, having decided to ride out the crash, I see no point in selling now.
Rodney Hobson is a private investor writing about his own portfolio. The opinions expressed in this column are those of the individual, and not of Morningstar, and should not be construed as financial advice.
