I was on Spring Break last week with the family, and missed a lot of interesting market movement and global news. I did hear of course the tragedy that hit Japan: earthquake, tsunami, nuclear shutdown and potential nuclear meltdown. The triple whammy had markets swooning, not only in Japan, but everywhere. The US markets gave up all of their gains year-to-date for a brief time, down almost 7%. As of today though, markets have rebounded so that the S&P is up around 3% year-to-date. Even worse, the Nikkei Index fell 18% at its lowest, and has since regained more than half its losses. Here are a few of my thoughts on Japan, utilities, and tech stocks.
Japan's Market in General
The Nikkei Index is now down 8.5% from pre-disaster levels. Barron's put out an article that was very bullish. "Buy Japan Now" it proclaimed over the weekend. Warren Buffett and Bill Gross have made bullish comments on Japan as well. (Bill Gross calls his a "tactical" position in Japan, that is, he is just trading it for the short term). Toyota shut its plants, but only until March 26th, 4 days from today. Both the Japanese government and the Bank of Japan have announced multiple monetary and fiscal stimulus packages to come, so it does seem likey that this will be more of a one or two quarter "blip" in Japan as opposed to a long drawn out recession. That is, as long as Japan avoids a nuclear disaster. I have no clue how to handicap that one.
However, after the Kobe quake in 1996, the market fell 25% before rebounding entirely over the next six months. According to the World Bank, this quake will cost $235BB, almost double the impact of the Kobe quake. Today, with the broader Japanese market down only 8.5%, I guess I am not that excited. "Be greedy when others are fearful" is a great Buffett quote, but I am not sure people are that fearful here.
Regarding particular ETFs or stocks in Japan, the obvious way to play Japan is via EWJ. It holds all the big cap and mega cap Japanese companies, including:
I am even more surprised by the performance of EWJ however. After initially falling 16.5%, EWJ has recovered to the point where today it's only down 6.5%. The US market is still down 3%, so I would say that it doesn't seem that compelling to me. Investors are taking a lot of risk now for a mere 3.5% underperformance vs the US market. Even the XLU, an ETF of US utilities, is still down 4.5% from pre-quake levels. More on that later.
As far as valuations, I am sure that there are cheap Japanese stocks, but the market as a whole is trading at around 14.8x earnings, about inline with the US market. (this is also before downward revisions which are pretty likely). To me, if you were nimble enough to buy at the lows last week, then I would say that it was obviously a good trade, and maybe there is a little room left, but not enough to make me buy anything now. Have people forgotton that Sendai, a major port city, was just about wiped off the map?
What is even more surprising is that EWJ now trades at the largest premium ever to its NAV. The 4.5% premium I assume is a result of investors rushing to get long Japan as quickly as possible, and perhaps some BOJ stimulus money flowing into equities too. Since January 2010, the range of premiums/discounts to NAV has been -3% to +2%. I don't recommend buying this when it's at any premium to NAV.
The final problem with buying Japanese equities right now is that G-7 Central Banks are coordinating efforts to depress the Yen. The Yen rallied initially after the quakes, but bankers will ensure the Yen goes lower. That is negative for any dollar-based investor buying Japanese equities or ETFs. Sure, you benefit by owning stocks that export goods to foreign countries. A lower Yen makes their goods cheaper. But a lower yen means that when you translate that back to dollars, you lose. Finally, given that only 12.5% of GDP in Japan is exports, net net you are much more long the Yen than short it via export-driven equities.
Next I comment on utilities and tech, as they got pretty crushed last week.