First and foremost let me say that our thoughts and prayers are with the people of Japan who continue to suffer in this awful tragedy. I know I have shared this story with many of you before, but any time my job forces me to focus on what is often the cold, hard reality of looking after our clients’ money during times that reminds us there are far more important things, it brings me back to those days after 9/11. I was with Invesco and I had to call fund families in New York with whom we did business to find out first, if they were alive, and second, whether they would be able to do business when the markets re-opened. It was not fun, but it was necessary. Even at times like this we have to remember that our first responsibility is to you, our clients.
So, let me cut to the chase: we had practically no exposure to Japan in any of our clients’ portfolios. We have had a sizable underweight to developed international, which is basically Japan and Europe, and within that space we had an underweight to Japan.
Having said that, we are not surprised to see the overall market react negatively to what is happening in Japan. We are also not concerned at the moment. There is a great scene in Disney’s “Pirates of the Caribbean,” when young Will Turner asks Mr. Gibbs about the story of Capitan Jack Sparrow. Mr. Gibbs talks about Jack being left behind on a deserted island and Will asserts that this must be the reason for Jack’s odd behavior. Mr. Gibbs responds, “Reason’s got nothing to do with it.”
There is a lot of investing wisdom there. Natural disasters often bring about market sell-offs and there is seldom an actual good reason for it. Business in Japan has certainly been disrupted, but the disruption is temporary. It is possible that insurance companies may be hurt with large claims, although JP Morgan this week in a letter to clients estimates that the losses will be handled easily. It is probable that Japan may need to import more coal until they can get their nuclear power plants operating safely again, but this is a temporary blip.
The truth is that Japan was an economic mess before this happened. They are still suffering from a deflationary spiral that has been going on sporadically for nearly three decades now. They are a net exporter to the world and consume relatively little, so the business disruption for US companies is not likely to be great. Even the largest Japanese companies like Toyota now manufacture in multiple locations including the US. Once the dust settles and they have the nuclear issues locked down, a rebuilding process will begin. That process actually will be stimulative to their economy.
In the meantime this tragedy occurs on the tail end of a strong six-plus month run for the stock market. Traders have been warning for a pullback but it just hasn’t happened. Is Japan a good reason for the market to fall? Well as Mr. Gibbs knows, “reason’s got nothing do with it.” Excuse, maybe; reason, no. Ultimately financial markets are about two things, prices and earnings. It is hard to see any real earnings disruption for non-Japanese companies, so any price reduction will just makes the market that much more attractive.
Of course we will be diligent should something change, but it looks like the market is progressing as we thought it would in 2011, three steps forward and two steps back.
Chuck Osborne, CFA
Managing Director
