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. 

  

Added to Guocoleisure and OCBC

We added 5000 shares of Guocoleisure (at $0.685) today, and a further 250 shares of OCBC (at $9.12). Quek Leng Chan has been consistently buying back shares of Guocoleisure over the past few months, which indicates management confidence in the company's stock. In addition, oil and gas royalties have increased with rising oil prices, which should provide a boost to the company's profits.

Market Correction - Time to buy?

In anticipation of technical downside risks in the market, we actually pared down our holdings in late January to raise cash levels to over 30% of the portfolio. This has worked out rather well as Asian markets have corrected sharply due to concerns over inflation, Chinese policy tightening, as well as fears of an oil shock sparked by tensions in the Middle East. 

We view such developments as short-term overhangs, and we have decided to add to the portfolio in incermental steps. A position was initiated in OCBC, which has a sizable insurance presence via its subsidiary Great Eastern Holdings as well as a strong private banking presence through its acquisition of ING Asia's private banking business in Singapore. While the stock is not cheap, we believe that OCBC will likely deliver the strongest ROE amongst the 3 local banks which should justify a slightly higher price-to-book multiple, and we picked up 250 shares at $9.25 today with a view to add more should the market continue to correct.

We also added 2000 shares of Tat Hong which delivered rather poor quarterly earnings for the most recent quarter. While the company currently faces some headwinds in China as well as Australia, we believe such issues are temporary and with the backing of $0.82 of tangible book value a share, we added 2000 more shares at $0.80.