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David G. Dietze, JD, CFA, CFP
David G. Dietze, JD, CFA, CFP
Articles (55)  | Author's Website |

Six Portfolio Strategies Following the Japanese Disaster

Amid the unfathomable loss of human life and property following Japan's magnitude 9.0 earthquake, spawning a tsunami that roared in at 500 miles an hour up to 6 miles inland, and an ongoing crisis at the Fukishima nuclear power site, it seems crass to consider the investment implications of this unfolding story. The crisis has not ended, as aftershocks continue, search and rescue perseveres, and crews struggle to restore cooling to the nuclear plants.

Investors have not waited to see exactly how this tragedy plays out. The Japanese stock market plunged as much as 16% last week in panicky selling conditions, while the Dow fell below 12,000, dropping nearly 7% from its February highs. The normally more placid foreign exchange markets fluctuated wildly, as the Japanese currency soared nearly 4% against the US dollar to a record all time high.

Amid the reverberations, speculation mounts as to the impact on the global economy, nuclear power, supply chains, energy and commodity demand, US Treasury bonds, and alternative energy. Here's our take on the investing opportunities and pitfalls:

In a Nutshell

For most investors, stay calm. Nobody really knows exactly how the situation will unfold. If you're sure of what's inevitable, consider if your views aren't the consensus, and thus already reflected in prices.

Are you a long term investor or short term trader? In the long term you are hard pressed to cite any natural disaster that didn't prove to be a buying opportunity, or at least in hindsight not a reason to sell. If you're a short term trader, recognize the risks you are assuming, trying to decipher what is actually happening, and at the same time anticipating others' responses, which probably won't be rational.

Most analysts expect Japan to bounce back and for nuclear power to maintain its important role. Infrastructure companies can expect to profit from the necessary rebuilding, while luxury consumer items may languish. It is unlikely that such alternative energy sources as wind and solar power will be able to overcome their drawbacks any time soon.

1. Stay the Course

Your best move amid the tragedy may be to do nothing. You certainly don't want to panic. Historically, whether it was Three Mile Island, the Kobe Earthquake, or even 9/11, the market came roaring back; those who tried to sell "to sit on the sidelines until uncertainties were cleared up," ending up getting back in, if at all, at a much higher price.

Consider: Following the Kobe quake in 1995, Japanese stocks dropped 25%. But they made that back and more over the ensuing year. Following 9/11, US stocks plummeted 11.6%, but then climbed nearly 20%.

Japanese stocks have already fallen 16%, before rebounding somewhat. While all recognize there has been a decline in expected economic activity, arguably that has already been discounted now that Japanese stocks are off about 10%.

In all events, given US companies' non-direct exposure to the calamity, madly dumping domestic equities makes no sense.

2. Buy Japanese Equities

Following a dismal two decades, Japanese equities were cheap coming into this debacle, despite boasting such world class companies as Toyota (NYSE:TM), Sony (NYSE:SNE), and Hitachi (HIT). In 1989, Japanese stocks constituted half of the world's equities, and traded at 60 times earnings. Now, after an 80% drop, Japanese equities trade at less than 14 times this year's earning and just 12.3 times next year's. These stocks also look attractive on a price to book basis, trading at just about book value, about half what prevails outside of Japan.

Such blue chips as Canon (NYSE:CAJ), Mitsubushi UFJ (NYSE:MFG), and Honda (NYSE:HMC) can be conveniently bought as ADRs on the New York Stock Exhange. Perhaps your simplest option is to buy a fund focusing on Japanese stocks, like Fidelity's Japan Fund (FJPNX) or the exchange traded iShares MSCI Japan Index fund (EWJ).

Looking for bit less Japanese exposure, to potentially reduce volatility? Try a regional fund, like Fidelity's Pacific Basin Fund (FPBFX); 37% of its holdings are Japanese. An international index fund would also be a great call right now, say Fidelity's Spartan International Index Fund (FSIIX), whose largest country exposure is Japan (21% of the fund); it boasts a rock bottom 0.1% expense ratio.

The only caveat is that you may well already have plenty of Japanese exposure. Although most companies don't reveal exactly how much of their business is from Japan, of the approximately 20 S&P 500 companies that do, Japanese revenues are 10% or more. For example, 11% of IBM's (NYSE:IBM) business is in Japan.

3. Buy Nuclear Power Generators

Following news of the Japanese disaster, US electric utilities owning nuclear facilities dropped 10% or more. The fear was a shut down in response to the debacle.

However, the administration has emphatically indicated that while a safety review is in order, there's no abandoning our commitment to this fuel. Indeed, nearly 20% of the nation's electricity comes from nuclear. Given the concerns over energy independence and deep water drilling, higher fossil fuel prices, and ground water contamination from some types of natural gas extraction, viable alternatives just aren't there.

Exelon (EXC) is the country's largest nuke operator, generating 17% of all such power in the country. The stock fell over 10% as concerns mounted, or about $2.6 billion in value. While design improvements developed from what is being learned from Japan may require as much as $1 billion in additional expenditures, the sell off seems too extreme, and the now enhanced dividend yield of 5.5% ample reward for the risk.

4. Avoid Solar Energy

The knee jerk response to the Japanese crisis was to pile into such alternative energy plays as solar power. For example, the Bloomberg Global Leaders Solar Index soared over 10% following the news.

However, analysts believe that solar's future is, well, not too bright. It currently is more hype than reality. For example, nuclear powers nearly 14% of the electricity generated worldwide, but solar a mere 0.06%.

Solar is plagued by, unsurprisingly, a lack of sunlight. Solar generators only provide 9% of total potential output, while nuclear is online 80% of the time.

Cost is probably the key sticking point. Solar generated power costs double nuclear generated power. That's not new information, but subsidies from governments helped bridge the difference. Unfortunately, new austerity programs have raised doubts on subsidies' future.

5. Yes, Consider Insurance Stocks

Insurers are seen paying out as much as $15 billion for the Japanese disaster. This follows an unusual spate of costly tragedies, including the New Zealand quake and the Australian flooding.

Investing in insurance stocks seems counterintuitive, given the magnitude of these payouts. However, following the last 15 natural disasters, insurance stocks, particularly reinsurance stocks, or companies that serve as backstops to primary insurance carriers, have outperformed the overall market in the ensuing year.

The opportunity emerges because, first, the knee jerk response is to sell the insurers, so investors have an opportunity to buy in at depressed levels. That indeed has happened in the wake of the Japan debacle, as shares in the world's two biggest reinsurers, Swiss Re (SWCEF) and Munich Re, plunged 15% in the immediate aftermath.

Second, as capital is paid out, capacity for future coverage declines, and Economics 101 tell us that declining supply must give rise to higher insurance premiums. Indeed, demand can be spurred amid the reemphasis of these potential risks.

6. Consider Infrastructure Stocks; View Cautiously Luxury Names

Assuming that the Japanese nuclear crisis can be resolved, the overall impact on the global economy is not likely to be overwhelming or permanent. Fidelity Investments estimates a reduction in global GDP of just one tenth of one percent.

About the author:

David G. Dietze, JD, CFA, CFP
David G. Dietze is president and chief investment strategist of Point View Wealth Management Inc., an SEC registered investment advisor, which he founded in 1993.

Visit David G. Dietze, JD, CFA, CFP's Website

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