We are at financial markets day 2 and today is quite a rollercoaster ride for the Japan markets. I have received quite a number of worried and enthusiastic enquiries today. Worried because of the collateral damage to the financial markets caused by Japan, And Enthusiastic because the Japan market is shouting “CHEAP CHEAP CHEAP”! Let me go deeper on this debate and our strategy forward.
The Japan market lost up to 14% today and recovered to a loss of 10.5% by the close of the market. The collateral damage to Asian economy is less than I expected with resource intensive SEA holding up well as compared to our more developed northern neighbours. Our current portfolio consisting of emerging markets with a big chunk of it in SEA and China should have weather this crisis quite well.
For clients who are asking me if it’s a good time to get into Japan now, I listed a couple of concerns:
1. I am not a major fan of Japan stocks in the first place as I believe the country is heading for an economic stagnation due to low birth rate and an exclusive culture that does not encourage entrepreneurship and immigration. Coupled with a sluggish government who prefers status quo than to make changes, potential growth of the country is stifled.
2. The total risk is still unknown as the market can still plunge by another 10% if there is a nuclear meltdown. Even though the areas affected are not as essential as the industrial and financial heartlands of the Kansai and Kantou area (Osaka, Kyoto, Nagoya and Tokyo), any nuclear meltdown with unknown an area of effect damage may lead to more serious impact on the industrial capacity of Japan.
3. Yen is artificially high as funds flow back to Japan and will drop sharply when the situation recovers. Any gains in stocks will be wiped out by the currency losses and most likely the risk that an investor has to undertake and the potential profit may not worth the trouble.
4. If the incident is similar to the US 911 crisis when the market dropped sharply and recover within 2 weeks. Switching of funds, which will take t+5 days and another day to buy (7 working days), may put us in a situation when the price may not be as favourable as what we wanted.
5. Personally, if I wish to take advantage of this situation, I will prefer to invest in countries which will help and profit from Japan’s recovery. Resource rich countries like Indonesia, Thailand, Australia and Russia. They need certain resources from these countries. Coal, timber and food from SEA to meet the sudden shortfall of agricultural and energy needs from Japan’s local economy. The downside risk is a lot lower compared to a direct exposure to the Japan economy and the upside potential can be just as good.
In short, I would say that the Japan Tsunami crisis can be an extremely good buying opportunity but the question is where and when to buy. So for those who are more adventurous seeking a higher risk/reward ratio, they can consider taking a blindfolded plunge into the Japan market. For more conservative investors who is more interested in protecting the capital while capitalizing on any good recovery profit, sticking to my current strategy should do the trick!
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