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India Equity Research Reports, IPO and Stock News
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● Friday’s tragic events do not alter our view that investors should
be overweight Japan. Crucially, we believe Japanese equities are
unlikely to follow their 21% fall (22% relative underperformance)
seen in the five months after the Kobe earthquake in 1995.
● The Yen appreciated by 22% in the three months after the Kobe
earthquake in part as insurance companies repatriated their
foreign holdings of assets in order to pay for the earthquake
losses. We believe that this time around the authorities would cap
the strength of the Yen. Our economics team believes that total
cost will be around 3% of GDP (half of Kobe), directly and
indirectly – and, in a worst case scenario, will take 1% off the
projected 2011 GDP growth (central case 0.2%).
● The nuclear issue: according to Japanese authorities, the event at
Fukushima is a level 4 incident on the International Nuclear and
Radiological Event Scale (INES), which ranges from 1 (“anomaly”)
to 7 (“major accident” – a stage so far only reached during the
Chernobyl disaster). That is, they rank it as an “accident with local
consequences”. Disruption to power: 25% of electricity generation
is from nuclear plants. TEPCO (the supplier in the Toyko area)
says that there is roughly a 12 GW loss of nuclear power
(representing 18% of electricity in the TEPCO area).
● Please refer to our full Global Equity Strategy reports:
Japan – Stay overweight and Further comments on the impact of Japan
Japan: Stay overweight
Friday’s tragic events do not alter our view that investors should be
overweight Japan. Crucially, we believe Japanese equities are
unlikely to follow their 21% fall (22% relative underperformance) seen
in the five months after the Kobe earthquake in 1995.
The main immediate observations
The Yen appreciated by 22% in the three months after the Kobe
earthquake in part as insurance companies repatriated their foreign
holdings of assets in order to pay for the earthquake losses.
We believe that this time around the authorities would cap the
strength of the Yen. Indeed, back in September the BOJ (instructed by
the Ministry of Finance) intervened for the first time since 2004 to cap
the strength of the Yen. More importantly, the 2 year note yield
differential is consistent with a weaker Yen. Additionally, back in
January 1995, the Yen was supported by the Mexican debt crisis and
Germany cutting rates. The Yen actually depreciated against the
Swiss Franc in 1Q 1995 showing that there was a general
environment of dollar weakness. Our FX team forecasts USD/JPY 89
by year-end.
Back in January 1995, Japanese equities were clearly not cheap –
unlike today. Japan’s 12-month forward P/E was 56x, compared with
16x for global markets. Today, Japanese stocks trade at a 12-month
forward P/E of 13x (compared with 12.2x for global markets). Back in
1995, Japan’s P/B was at a 6% premium to global equities, compared
with a 40% discount today.
The economic impact of disaster
Our economics team believes total cost will be around 3% of GDP
(half of Kobe), directly and indirectly – and, in a worst case scenario,
will take 1% off 2011E GDP growth (central case 0.2%). The policy
response to this crisis should be much better than Kobe: (a) the fiscal
stimulus package should be bigger than the three supplementary
packages after the Kobe earthquake (amounted to an aggregate $39
bn); (b) after Kobe, the Yen appreciated 22%, while this time around
the BoJ will stop Yen appreciation; and (c) the BoJ has already
doubled the size of its QE program to Y10 tn ($120 bn) yesterday.
Disruption to power
25% of electricity generation is from nuclear plants. TEPCO (the
supplier in the Toyko area) says that there is roughly a 12 GW loss of
nuclear power (representing 18% of electricity in the TEPCO area).
There is 12.4 GW of effective spare capacity in thermal power
generation, which could offset the loss of nuclear.
The nuclear issue
According to Japanese authorities, the event at Fukushima is currently
a level 4 incident on the International Nuclear and Radiological Event
Scale (INES), which ranges from 1 (“anomaly”) to 7 (“major accident”
– a stage so far only reached during the Chernobyl disaster). That is,
they rank it as an “accident with local consequences”. We note that an
important part in the unfolding of events may now be influenced by
weather conditions.
Why we are overweight Japan
● The stage of the cycle benefits Japan
● Valuation
● The USD/JPY two-year note yield differential is widening
suggesting a weaker Yen
● Macro policy is less reactive
● There are some signs of encouraging corporate change
● The positioning is bearish
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Friday’s tragic events do not alter our view that investors should
be overweight Japan. Crucially, we believe Japanese equities are
unlikely to follow their 21% fall (22% relative underperformance)
seen in the five months after the Kobe earthquake in 1995.
● The Yen appreciated by 22% in the three months after the Kobe
earthquake in part as insurance companies repatriated their
foreign holdings of assets in order to pay for the earthquake
losses. We believe that this time around the authorities would cap
the strength of the Yen. Our economics team believes that total
cost will be around 3% of GDP (half of Kobe), directly and
indirectly – and, in a worst case scenario, will take 1% off the
projected 2011 GDP growth (central case 0.2%).
● The nuclear issue: according to Japanese authorities, the event at
Fukushima is a level 4 incident on the International Nuclear and
Radiological Event Scale (INES), which ranges from 1 (“anomaly”)
to 7 (“major accident” – a stage so far only reached during the
Chernobyl disaster). That is, they rank it as an “accident with local
consequences”. Disruption to power: 25% of electricity generation
is from nuclear plants. TEPCO (the supplier in the Toyko area)
says that there is roughly a 12 GW loss of nuclear power
(representing 18% of electricity in the TEPCO area).
● Please refer to our full Global Equity Strategy reports:
Japan – Stay overweight and Further comments on the impact of Japan
Japan: Stay overweight
Friday’s tragic events do not alter our view that investors should be
overweight Japan. Crucially, we believe Japanese equities are
unlikely to follow their 21% fall (22% relative underperformance) seen
in the five months after the Kobe earthquake in 1995.
The main immediate observations
The Yen appreciated by 22% in the three months after the Kobe
earthquake in part as insurance companies repatriated their foreign
holdings of assets in order to pay for the earthquake losses.
We believe that this time around the authorities would cap the
strength of the Yen. Indeed, back in September the BOJ (instructed by
the Ministry of Finance) intervened for the first time since 2004 to cap
the strength of the Yen. More importantly, the 2 year note yield
differential is consistent with a weaker Yen. Additionally, back in
January 1995, the Yen was supported by the Mexican debt crisis and
Germany cutting rates. The Yen actually depreciated against the
Swiss Franc in 1Q 1995 showing that there was a general
environment of dollar weakness. Our FX team forecasts USD/JPY 89
by year-end.
Back in January 1995, Japanese equities were clearly not cheap –
unlike today. Japan’s 12-month forward P/E was 56x, compared with
16x for global markets. Today, Japanese stocks trade at a 12-month
forward P/E of 13x (compared with 12.2x for global markets). Back in
1995, Japan’s P/B was at a 6% premium to global equities, compared
with a 40% discount today.
The economic impact of disaster
Our economics team believes total cost will be around 3% of GDP
(half of Kobe), directly and indirectly – and, in a worst case scenario,
will take 1% off 2011E GDP growth (central case 0.2%). The policy
response to this crisis should be much better than Kobe: (a) the fiscal
stimulus package should be bigger than the three supplementary
packages after the Kobe earthquake (amounted to an aggregate $39
bn); (b) after Kobe, the Yen appreciated 22%, while this time around
the BoJ will stop Yen appreciation; and (c) the BoJ has already
doubled the size of its QE program to Y10 tn ($120 bn) yesterday.
Disruption to power
25% of electricity generation is from nuclear plants. TEPCO (the
supplier in the Toyko area) says that there is roughly a 12 GW loss of
nuclear power (representing 18% of electricity in the TEPCO area).
There is 12.4 GW of effective spare capacity in thermal power
generation, which could offset the loss of nuclear.
The nuclear issue
According to Japanese authorities, the event at Fukushima is currently
a level 4 incident on the International Nuclear and Radiological Event
Scale (INES), which ranges from 1 (“anomaly”) to 7 (“major accident”
– a stage so far only reached during the Chernobyl disaster). That is,
they rank it as an “accident with local consequences”. We note that an
important part in the unfolding of events may now be influenced by
weather conditions.
Why we are overweight Japan
● The stage of the cycle benefits Japan
● Valuation
● The USD/JPY two-year note yield differential is widening
suggesting a weaker Yen
● Macro policy is less reactive
● There are some signs of encouraging corporate change
● The positioning is bearish
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