As the crisis in Japan moved from natural disaster to
potential nuclear meltdown, investors around the world weighed
the mounting economic and financial uncertainty.
Japanese authorities removed emergency workers from the
third reactor at Fukushima Daiichi Nuclear Power Station
following an explosion there on Tuesday morning, which damaged
a containment structure and raised the odds of greater
radioactive emissions. Without workers on hand, the odds of a
meltdown appeared to be higher. However,
water levels in the reactor began to rise later in the day, and
radiation levelsbegan to fall.
Equity markets around the world declined amid fears that the earthquake
and tsunami that hit the country on March 11, damaging nuclear
power facilities, will slow economic growth and hurt asset
prices. On Tuesday, Japans Nikkei 225 index fell 10.6
percent, extending a 6.2 percent loss on Monday. It was the
deepest two-day drop since 1987. Stocks in many other markets
around the world declined too. S&P 500 futures fell 2.8
percent in New York on Tuesday morning. The S&P 500 fell
0.6 percent on Monday. Treasury prices rose.
Japanese stocks are high, relative to global markets. And
many experts believe that U.S. equities may be due for a
correction as well. The crisis in Japan, compounding
geopolitical risks in the Middle East, could affect equity
values for an indeterminate amount of time.
Since Japanese equities have been out-performing
global equities year to date, we believe recent events will
prompt profit taking and expect investors to remain on the
sidelines near term until there is greater clarity on the
repercussions of the disaster on prices and on the outlook for
oil prices, Goldman Sachs analyst Kathy Matsui said in a
note to investors.
Its a negative for equity markets, says
Eric Lascelles, chief economist at RBC Global Asset
Manufacturers from autos, to semiconductors and steel have
temporarily shut down operations in parts of Japan. That has
disrupted the flow of goods around the world. Japans
semiconductors are used in Apple Computer products and South
Korean consumer electronics. Shipbuilders in South Korea count
on steel from Japan. Consumers and auto dealers around the
world will be feel the brunt of auto plant shutdowns in Korea.
And luxury goods makers are expected to lose business as
exports to Japan slow down. Shares of Burberry Group fell 4.3
The implications for the nuclear energy industry will be
negative for the short term, and possibly for the long term,
according to Lascelles.
The cost to insurers well may rival the record $62 billion
that followed Hurricane Katrina. One question is whether
this will turn out to be the largest insurance loss of all
time, Lascelles said. Shares of Hartford Financial Group,
which derives about 15 percent of its revenue from Japan, fell
about 2.8 percent.
He doubts that the crisis will bring down an insurance
company. But the losses could lead to higher insurance rates
for customers around the world. And as insurance company raise
cash to pay off claims, but may be forced to sell assets,
thereby hurting the values of seemingly unrelated equities
around the world. While the scale of such forced selling
relative to the size of global markets wont be huge, it
could still be a factor for investors to consider.
As recovery and rebuilding efforts get underway, companies
in the construction sector could benefit, though.
It could be sometime before the implications for various
sectors, from insurance, to technology, manufacturing and
construction, are fully priced into the market, according to
Lascelles. These trends still have some legs. They have
some way to go, he said.
It remains to be seen how the crisis will affect the
Japanese economy itself. The optimistic view, Lascelles said,
is that it will provide the growth catalyst that Japan has
needed for decades.
But the rebuilding efforts will create more fiscal strain on
Japan, where the ratio of debt to GDP already is 200 percent,
compared to 90 percent in the U.S. Japan is chronically
under insured, according to Lascelles. That means that
the government will pick up the tab for a particularly large
part of the recovery effort, pushing the level of public debt
perhaps even higher.
Japans high debt level has been manageable because of
extremely low interest rates, and the fact that it is funded
domestically. The country isnt overly dependent on
foreign reserves. But if the debt level goes much higher, that
balance could be thrown off.