The recent earthquake and subsequent tsunami in Japan has naturally caught the world’s attention. Our thoughts are with the people of Japan during this time of great human suffering.
One of our management teams, Signature Global Advisors, has provided me with their view on how this natural disaster will impact the Japanese economy. Below is a brief commentary from Drummond Brodeur, Portfolio Manager from our Signature team who specializes in Asian securities. Drummond also discusses their funds’ exposure to Japanese securities.
At this time, many uncertainties remain and the key risks of further aftershocks and nuclear accidents are impossible to quantify.
In terms of our portfolio exposure, all of our funds were significantly underweight in Japan compared to their respective benchmarks. Beyond our global and international funds, no fund has a direct exposure greater than 1%.
We do expect there to be several short-term implications as markets asses the scale of damage and policy responses. From a macro perspective, there will clearly be a near-term hit to Japan’s fledging economic recovery, as many factories and facilities close for varying lengths of time to asses and repair any damage. In the medium-term, there will be an offset as significant disaster recovery and infrastructure rebuilding commences. The earthquake and tsunami hit to the north of Tokyo while the core of Japan’s industrial heartland is to the south. Overall, most of Japan’s key global industries and international trade infrastructure remains operational. The region covered by the disaster is estimated to account for about 6% of Japan’s GDP.
The Japanese government will be required to fund significant rebuild programs and given their massive debt and deficit, how these get funded is unclear. Certainly, some will come from various reserves designed for such purposes, but it will also likely require additional borrowing, which could potentially be funded through further easing by the Bank of Japan (BOJ) or quantitative easing as the U.S. calls it. I have argued for many years that with structural deflation and a strong Yen, the BOJ should be printing more money regardless and such a tragedy may be a catalyst for more aggressive policy. While the Japanese government may have a massive debt, we cannot forget that Japan as a nation has massive net savings and continues to run a current account surplus, so policy options do exist. As for the currency, initial strength is expected as funds are repatriated by companies and financial institutions. Think of insurance companies facing significant claims needing to sell and repatriate some of their overseas holdings. By later in the year, I would expect any Yen strength to reverse as weaker economic numbers and low rates weigh on the currency, particularly if the U.S. recovery continues to gain traction. The ultimate pace and direction for the currency will be dependent on Japan’s policy decisions over the coming months, which we will continue to monitor.
One area of particular concern is the damage to nuclear facilities. While the extent of damage and radiation leakage remains unclear, at the very least, one and possibly two plants have been rendered permanently inoperable while several more have been shut down to asses any potential damage and will be offline for months. In the near-term, Japan will have to rely on a significant increase in gas, oil and coal fired power generation, thereby increasing demand for oil, gas and coal imports. One likely consequence of the unfolding nuclear plant accidents will also be an increased aversion globally to expanding nuclear power generation, particularly in the West.
Several refineries have also been closed, so we can expect a decline in crude imports and an increase in refined product demand, leading to an overall tightening in these markets. For the electronic components and auto industries, there will be some specific disruptions in supply chains, but for the most part, these industries are globally diversified and supply will be sourced from alternative sources and existing inventories, thereby also tightening up several of these markets as well.
We were lucky to have a very limited exposure to the areas directly impacted by this disaster. All of our portfolio managers and analysts continue to look into the potential implications in their sectors and holdings, and will interpret information as it becomes available. In short, the unpredictable nature of such events only underscores the need for well diversified portfolios, across regions, sectors and asset classes, where appropriate, such as those managed by the Signature Team.
Drummond Brodeur, Signature Global Advisors
No comments:
Post a Comment