Japan's Hard-Hit Stocks Will Rise Again

03/14/2011 5:16 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Weighed against the thousands of lives lost, scores of cities and towns erased, and nuclear power plants popping like so many champagne corks, the market fallout from the disaster in Japan hardly seems consequential.

But it is nevertheless pushing stocks in the United States below key technical supports, after dropping Japan’s Nikkei index 6% overnight. So someone’s certainly acting as if the economic consequences will be dire for Japan and at least onerous for everyone else. 

Past natural catastrophes suggest otherwise. Even the Kobe earthquake in 1995—which struck a more economically crucial area, and devalued Japanese stocks by 25% over the ensuing six months—looked like a speed bump in retrospect a year later. The Asian tsunami, hurricanes Katrina and Rita, and last year’s Chilean quakes faded much faster than that from investors’ memories.

Shocking as such catastrophes are, they tend to be hiccups where economic growth is concerned, because for the most part economic activity doesn’t let up—some of it is simply redirected from consumption and investment toward reconstruction. 

The Currency Question
The bigger risk to the Japanese exporters so enthusiastically punished by the market today stems not from the currently widespread interruptions in production, but from the longer-term risk that the repatriation of capital needed to finance the rebuilding will tend to drive up the value of the yen, thereby crimping exporters’ profit margins.

Then again, if one early guesstimate is right about the catastrophe’s $35 billion maximum tab, this hardly seems daunting relative to the $568 billion average daily turnover in the dollar/yen forex-trading market. [The “maximum” has since been revised, with some estimates now approaching $600 billion—Editor.]

If the idea that Japan will suffer permanent economic damage is wrongheaded, the notion that global growth will suffer seems even more far-fetched, except as an excuse for the declining stock market. The stricken region in northeast Japan accounts for less than 8% of the nation’s GDP, which itself now represents less than 6% of the global total.

It’s always possible that the disaster will be the straw that breaks the camel’s back, on top of Mideast unrest, China’s inflation problem, and European debt woes. More likely, the market is simply in the mood to count straws after buying some camels for more than they’re fetching currently.

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Investing in the Aftermath
The disaster and the market plunge come just as investment gurus have warmed to Japanese equities that are historically cheap, trading below book value in the case of small caps.

Some of them are not backing off in the tsunami’s aftermath. “When you look at the valuation of Japanese companies, if you look at what’s happening with Japanese managements in terms of improving operating efficiency, we’re still excited about the Japanese equity market,” David Herro of the Oakmark International fund (OAKIX) told Bloomberg.

Yiannis Mostrous of Personal Finance and Global Investment Strategist is bullish as well, urging readers to buy shares of Mitsubishi (Tokyo: 8058, OTC: MSBHY) and Mitsubishi Estate (Japan: 8802, OTC: MITEY) in addition to Fast Retailing (Tokyo: 9983, OTC: FRCOY).

These stocks are down 7% to 8% today, though it’s hard to imagine that a rebuilding Japan won’t need Mitsubishi’s expertise in steel, energy, logistics, and environmental cleanups, or to figure out how a disaster that destroyed so many personal possessions will hurt the country’s biggest discount retailer. Today’s selling smacks of an over-reaction.

Mostrous’s colleague Elliott Gue goes a step further in comparing the sell-off in nuclear stocks to the drubbing of deep-water drillers following the Gulf platform explosion and spill last year.

As with that tragedy, “The doomsayers are blowing the environmental risks way out of proportion with reality, the long-term growth story is intact, and this will ultimately prove an outstanding buying opportunity,” he argues.

Gue points out that the affected reactors worked properly until the tsunami swept away backup generating systems, and that the worst-case scenario in Japan is far better than what happened in Chernobyl with that way more dangerous Soviet-designed reactor.

He likes uranium miner Cameco (NYSE: CCJ) under $42 a share; it’s trading near $32 after today’s 15% meltdown.

China’s got 27 nuke plants under construction and 50 more in planning stages, Gue notes. These aren’t going to be mothballed because of the Japanese tsunami. Will the Japanese stop buying diamonds and designer handbags as a result? I kind of doubt that as well.

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