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Markets Not Broken By Friday's Tragedy

Monday March 14th 2011

In the first few days that follow the dreadful events of Friday, March 11th in Japan we of course expect stocks in Japan and elsewhere to feel spooked. Afterall this is another dose of stress on top of the Euro Zone farce and the ongoing Jasmine Revolution across the Arab oil rich world.

So it was no surprise to see The Nikkei 225 and Topix extend losses as trading resumed on Monday. I for one applaud the Japanese for opening. It would have been easy to hide in terrible grief. That would have only made things worse.

Of course the human cost is dire and loved ones cannot, like builings, boats, cars and planes be replacd. But the world still turns and Japan will put its shoulder to the wheel. It will clean up, respair, restore and rebuild. This quake will not break the bull market in global equities.

There will be plenty of data sites to tell interested readers the percentage degress of the fall. I will not do that for I wish to look outward to the future.  I cannot wallow in the human grief, for to do so would be an evasion of my duty as a financial analyst...I am sad but I will not intrude on others grief. I will though say what the facts are.

The raw economic consequences will,  in the full scheme of things be  modest. There will be reconstruction, an extension of government funded stimulus. Yes the Japanese may, in the medium term, need to draw more from the world's reserves of oil and gas but the world will cope. Let's not overdo the oil card for there is oil available. In the short term Japan's demand will decline and as a large consumer that effect is substantial. As for oil availability in the future there are new sites in Poland and the Bahamas to be explored...so please do not go over the top about an oil shortage.

There is not a major international meltdown on the way although I am still deeply depressed about the farce that rumbles on and on in Europe. Several nations are bust, but the Euro Zone mob simply will not permit it. Still that is not new news and there is no new dynamic there to lead one to restyle a portfolio unless one is a day trader.

In the world, be it G7 and E7 plus Sub Saharan Africa we are enjoying thefastest global economic growth since 2007. Because the strong cost cutting undertaken by corporate America , Asia and Europe we also see record net income gains that have driven a rally of over 90% in the  MSCI All-Country World Index of 45 nations.

Infaltion comes in 2 key forms and the external cost push is not to be ignored, but our consumer demand levels are not inflationary and technolgy is not static. N?w techniques are coming on stream all the time and I see equities as the best asset class of choice as a result of the setback. 

The global market is itself a trememndous buy right now and it is only right to put Japanese equities under the immediate spotlight. I stress again the events of last Friday are dreadful but the broader scope on Japan does need nor require any alteration. The valuation of Japanese companies given their extremely high levels of efficiency mean that one should jump in and pick up stock in the world class names such as Honda and Toyota, Komatsu or Sony and Fujitsu. This is the time for a sturdy stomach and a time to be engaged.  Use this as an opportunity to buy quality at lower price as in a few months time one will see that the quake and tsunami did not impact the long-term price of the companies we feel it is right to buy.

Global growth is not going to be derailed by the quake. Friday's events will not undermine the $12Tn that has been injected into the global economy and financial system via increased government stimulus spending and central bank liquidity additions. In 2011 global GDP will advance by 4.4% year and 4.6% in 2012. Don't trust me...take it from the IMF.

In 2010 the nation of Japan had a GDP level of  $5.4Tn which equated to 8.7% of the global total; itself higher by 5.0%. Japan was, pre Friday expected to grow by 1.5% this year, however, whilst Q2 and Q3 will take a dent, the activity from reconstruction will mean that by the end of Q4 the Japanese numbers will not be too far off the mark.

Get to the global outlook, and the events of Friday are going to prove extremely small scale in their impact. I am an unashamed equity bull and I am counting on great profits from the G7 corportaions to power our indices ahead. Taking the S&P 500 as a benchmark look for profitability to run just shy of $100 a share this year.

In Q2 and Q3 Japan is going to operate without the activity of the Cosmo Oil Co.’s 220,000 barrel-a-day refinery in Chiba, outside Tokyo, and in addition JX Nippon Oil & Energy has shuttered refineries in Sendai, Kashima and Negishi. this will lead to a fall in crude demand and so ease back a little of the demand that took prices to recent highs.

Of course I would never seek to undersell the impact of Friday and he terrible local costs to human life ...howvever, just in the aftermath of Katrina a reference to  catastrophe history shows that the impact is rarely permanent. Short term downturns in an economy and thereseultant rebuilding efforts give rise to renewed economic activity.

So of course there is the panic trade to reduce the risk profile and to fly to bonds as  the nearest  short term safe harbour. However, a wise investor will not be sucked into the low yield game...the right startegic play here and now is to pick up equities and buy the dip. 

Stephen Pope

Managing Partner   Spotlight Ideas

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