It has now been five days since the magnitude 9.0 earthquake hit Japan. Following falls of 6.2% on Monday and 10.5% on Tuesday, the Nikkei rebounded to close up 5.7% in overnight trading. Since the earthquake struck the MSCI World has fallen by 3.2% and the FTSE 100 by 3.3%; however, the markets look to be stabilising.

Despite the overall falls in Japanese markets, and notwithstanding the tragic human cost to this event, our managers have a broadly positive outlook for the recovery of Japan. The following is a summary of further views obtained from our investment managers as the situation has unfolded.

Richard Oldfield – High Octane

Richard Oldfield, the manager of the High Octane fund, has a holding of approximately 21.3% in Japan. On Tuesday he provided the following comment:

“Our only action to date has been to increase marginally the investment in Hitachi. Hitachi has been affected most in share price, it appears to us, because they have some factories in the region of the tsunami, and because they have a nuclear operation (in joint venture with GE of the US). Ex-earthquake, earnings this year were likely to be around ¥50 with considerable room for further improvement. We regard the share price, at ¥360, as highly attractive.

Needless to say, the position is highly uncertain, with the situation at the nuclear facilities still unresolved, and risk of more explosions, radioactive leaks, and casualties. But however ugly the immediate prospect, in time what has happened in Japan in the last week will be seen as interruption. The government and Bank of Japan will presumably do all they can to stimulate the economy – which, involving monetary and fiscal stimulus, we would regard as likely to weaken the yen rather than, as in the immediate aftermath, to strengthen it because of funds being repatriated to Japan. Companies will lose production, in some cases and in some areas for a prolonged period, but nonetheless this too is an interruption. Meanwhile share prices are 20% lower than they were a few days ago so that the valuation, in terms of price to book value and other measures, of companies is even more attractive for the long term investor. We are therefore inclined to invest more in existing Japanese holdings or in other companies. We will be evaluating this carefully over the next day or two. Additional investment in Japan also involves disinvestment from somewhere else, and one of the main difficulties will be deciding what, if anything, to sell.”

Bernard R. Horn Jr – Worldwide Opportunities

Bernard R. Horn Jr., the manager of the Worldwide Opportunities fund, has a total holding of around 7.2% in Japan.

In a telephone call with Bernie yesterday afternoon he stated that he is keeping a very close eye on the situation in Japan and paying particular attention to the uncertainly over events surrounding the nuclear power plants. Bernie went onto say that “of course, an event like this will cause almost every sector to suffer but most of the stocks held within the fund are defensively positioned and should recover as Japan re-builds itself”. In terms of the portfolio holdings, only Nippon Yusen sustained damage to a tiny proportion of its shipping fleet.

 

Overall, Bernie said that the fund is well positioned in the global market by currently having an elevated cash level, at around 9.7%, as a result of selling top performing stocks. Bernie now sees this free cash as an excellent opportunity to buy selectivity. Moreover, some stocks outside of Japan are actually benefiting, such as Thai Oil and Samsung, as Japanese manufactures temporarily slow down production.

 

THS Partners – THSP Managed and International

Cato Stonex, Mark Evans, Robert Smithson and Ali Miremadi manage our THSP Managed and International funds which have a limited exposure to Japan of around 1.4%. THSP made the following comment yesterday:

“Whilst the Japanese holdings have fallen the investments still represent a small part of the portfolio (under 4%) and their effect on the overall performance is therefore extremely modest. However, the general market has also weakened significantly, which has obviously been reflected in our portfolios. Since the start of the year, the market had performed well and a retrenchment was likely. A combination of the news from North Africa and the disaster in Japan have magnified and accelerated this process. As a final word, we note that every crisis produces opportunities and we are investigating some of the value opportunities that have appeared.”

Japanese Equity Team – Invesco Perpetual Managed and Strategic Managed

The Invesco Perpetual Managed and Strategic Managed funds have approximately 3.1% in Japan. The Japanese Equity Team at Invesco Perpetual made the following comment yesterday:

“The devastating earthquake and tsunami that hit Japan on Friday has clearly had a huge human cost, the full extent of which will only become clear over the next few weeks. In terms of the economic impact, we believe that there will be some short-term negative consequences, but that the longer-term recovery remains in place. The economy has been experiencing a rebound in activity following the contraction in the fourth quarter of 2010, with key indicators, including export volumes and levels of domestic investment picking up. The economy’s full recovery from this brief lull is now likely to experience a short-term interruption, but we do not expect there to be a significant impact beyond this timeframe.

The area hit, around the city of Sendai in the Tohoku region, has limited production facilities, which are concentrated in central Japan. While the current disruption to power supplies has extended further across the country, we expect this to be quickly resolved and for activities outside of the area directly affected to return to normal. The Tohoku region accounts for around 8% of Japanese GDP, approximately half of the Kobe area, which experienced Japan’s last comparable earthquake in January 1995. Industrial production fell into negative territory in February following the Kobe earthquake, but was positive again by March.

Japanese authorities have been quick to respond and the Bank of Japan has announced that it will add a further ¥5 trillion to its asset purchase programme and is providing ¥15 trillion (approx. $183bn) of liquidity to financial markets. It is also encouraging that, despite the likelihood of a special budget to help finance the reconstruction work necessary, bond prices have remained firm. The reconstruction effort in itself may also have a positive impact on the economy. Monday’s trading in Japanese financial markets saw significant weakness. Volatility during the current situation is to be expected, but on fundamental grounds we continue to see significant value in Japanese equities. In our view, the recovery in developed markets, most notably the US, and the ongoing growth in Asia are more significant drivers of profitability among Japanese companies. Growth in these regions is likely to remain supportive and we believe that the traditional transmission of export strength into the domestic economy will again be evident.”

The information contained herein represents the view and opinions of our fund managers, and not those necessarily held by St. James’s Place Wealth Management.

Regards

Neil

 

Neil Gubbins

ST. JAMES’S PLACE

WEALTH MANAGEMENT

11 Hamilton Place

Mayfair

London W1J 7DA

T: 020 7495 1771

M: 07739 263334

www.sjpp.co.uk/neilgubbins