Dear Friends, 

There are many fears that the recent Japan Tsunami Crisis will have an immerse impact on the world financial markets, especially Asia. I have pushed the emergency update till Monday when the markets are open so as to give a better assessment of the impact.

In short, there will be a knee jerk emotional sell off in the short term while the long term growth of the global economy will not be affected. Here are some important facts to be considered:

  1. The portfolio I constructed has no exposure to Japan. Any impact will be indirect. Based on the impact of the 2004 Indonesia Tsunami Crisis, the regional stock market recovery will be rapid. May be a buying opportunity.
  2. The Japan Nikkei stock index has dropped 4.5% as of now and is expected to fall up to 10% as industrial production is partially affected due to temporary electricity and water outage. The Tsunami has hit mainly non essential industrial areas.
  3. Oil prices experienced a sharp drop as the expected fall in oil consumption in the 3rd largest economy in the world will fall due to the crisis. On the other hand, materials and raw resources stocks are expected to do well as Japan will need resources to rebuild the economy. In my opinion, both effects will offset the sentiments of the resources market and will not have a big impact in the longer run.
  4. Japanese Yen has a sharp rise as hot money is pulled back to the country for any emergency use. This will impact the Japan economy than the rest of the Asia. Asia resource producing countries will do well as they will sell rebuilding resource at a better currency exchange. 

I do not see a need for any change in the current strategy. Buying into Japan as a form of short term strategy may sound good but reality, the returns will not be fantastic given currency exchange risk as yen will fall sharply as the economy recovers, offsetting the potential gain in the stock market. I will continue to monitor the situation and update you if the needs arises.

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