Japanese Nuclear Worries Roil Market - Adding to the Portfolio

Stock markets were roiled by concerns over a potential nuclear meltdown in Japan, triggered by the 9.0 Mw earthquake which hit the Sendai region of Japan last Friday. While the initial reaction of global stock markets to the earthquake was relatively muted (in contrast to the hefty declines posted by the Japanese stock market), concerns over the impact of the earthquake on several nuclear power plants sent global stock markets reeling on Tuesday.

Prime Minister Kan's live video telecast today (15 March 2011) did little to comfort the jittery global community, and as the PM revealed that the possibility of nuclear leakage was increasing and that those in a 20km radius around the Fukushima Daiichi nuclear power plant were being evacuated, stock markets in Asia plunged on uncertainty surrounding the situation in Japan. The STI fell by as much as 3.3% as selling intensified on concerns that nuclear power plants in Japan could suffer a meltdown, which would have dire and unthinkable consequences. The Singapore market ended the day 2.8% lower, with losers on the exchange outpacing gainers 610 to 59. 

Taking a step back from the frenzied selling and huge uncertainty, we see the sell-off as a manifestation of uncertainty and fear, rather than a rational adjustment of prices for various assets. The Sendai earthquake will likely cause a series of contractions in the Japanese economy, but will have limited impact on the global economy, given that Japan's contribution to overall growth has largely been discounted. As Japan embarks on its rebuilding process, this should boost economic growth (in a perverse way), and given sufficient time, we can expect the economy to emerge from this crisis on relatively firm footing. This will have some impact on select sectors in the near term, but ultimately should prove to be little threat to the overall growth of the global economy.

A 16% discount in the Japanese stock market over two sessions appears excessive, and it is increasingly tempting to punt the Japanese stock market now. The risk-reward tradeoff certainly appears in favour for those long the market, despite the heightened volatility, especially if a longer-term investment horizon is employed. Nevertheless, we remain unfamiliar with the situation with specific corporate names in the country and will not seek opportunities in that area.

For the local stock market, we think the selloff in blue chip names remains overdone, and we picked up 500 shares of OCBC at $9.115 and 1 lot of WBL Corp today at $3.90. Both are unlikely to face any severe reprecussions of the latest series of problems, and we will be looking to employ more cash should the irrational sell-off continue over the next few days.