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Global Stock Rally May Withstand Japan Disaster

Stocks in Japan may extend losses when trading resumes 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 Stock Average will slide about 2 percent when trading begins, futures show. The domestic impact may be limited because lost production from the Tohoku region where the quake struck might not be enough to spur a recession, Bank of America Corp. said. The Bank of Japan pledged to ensure financial stability by providing liquidity.

The fastest global economic growth since 2007 and record U.S. profits that helped spur the 95 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.

“It’s a very bad situation, but from a market standpoint it may not be so negative,” said Patrick Legland, the Paris- based global head of research and strategy at Societe Generale SA, which oversees about $300 billion. “I expect the Japanese market to be down in the short term, but there is so much to rebuild that all in all it may be positive in terms of longer- term demand and investments.”

Fastest Since 2007

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.

"If you’re talking at the level of the global economy, I’d say it’s very limited," said Michael Shaoul, chairman of Marketfield Asset Management, which oversees $1 billion in New York.

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 2.9 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.

Easing Inflation

"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," SocGen’s Legland said.

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.

Kobe Earthquake

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 any growth that is lost to the quake. The Ministry of Finance projected in January that government debt will increase 5.8 percent to a record 997.7 trillion yen ($12.2 trillion) in the year starting April 1.

Bonds, Yen

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.”

Timber, Steel

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 Co., 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 advanced 2.1 percent. Komatsu Ltd.’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.

“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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Japan Plans Spending Package as Quake Slams World's Most Indebted Economy.

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Nuclear Renaissance Threatened as Japan Fights Meltdown at Quake-Hit Plant.

Global expansion of nuclear power may draw more scrutiny and skepticism as the world watches Japan struggle to prevent a meltdown at a reactor damaged by a record earthquake, a former U.S. atomic regulator said.

“This is obviously a significant setback for the so-called nuclear renaissance,” said Peter Bradford, a former member of the U.S. Nuclear Regulatory Commission. “The image of a nuclear power plant blowing up before your eyes on a television screen is a first.”

(발췌인용: Bloomberg)