The destructive power of nature was on full display on Friday 11 March 2011 as Japan experienced a powerful 9.0 magnitude earthquake. The earthquake, which had its epicenter off the eastern coast of Japan, triggered an extremely destructive tsunami and 10 meter tall waves struck the coast of Japan minutes after the earthquake. This double tragedy led to widespread destruction of life and property. Entire towns were submerged and destroyed and over 20000 lives were lost. This natural disaster was further compounded by the explosions in a series of Japanese nuclear reactors which led to the release of harmful radiation into the atmosphere.
The natural tragedy and the nuclear meltdown that followed have changed the economic landscape of Japan forever. While the Japanese government has initiated swift rescue efforts, the fallout of this massive tragedy has taken a heavy economic toll with both foreign and domestic investors selling out of Japanese stocks and the Nikkei has fallen over 20%. Moreover, Japanese exports have been hard hit as most factories and ports are not operational, creating even more problems for the already beleaguered Japanese economy.
For those of us who already own Japanese stocks and for those who want to invest in them; the million dollar question is – What do we do now? Do we wait for things to settle down before buying or do we simply ignore Japanese stocks for the short term or do we start buying world-class Japanese companies at rock bottom valuations. The last choice is without doubt the most logical and profitable for all value investors. Today we shall discuss the major reasons why Japanese stocks represent a compelling buying opportunity.
With decades of sub-par growth, deflation and massive levels of state debt, the Japanese economy was facing a hard time even before the earthquake. Japanese stocks were already available at a significant discount to the 60-something P/E that they traded at prior to the 1989 crash. The earthquake has only made this valuation discount even bigger and Japanese stocks are currently at their cheapest levels in over 25 years. This the main argument for buying Japanese stocks as Japan has probably seen the worst and things can only improve from here.
History has shown us that the Japanese economy tends to recover very quickly after earthquakes and other natural disasters. The Great Hanshin earthquake that struck Kobe in 1995 was equally devastating and led to over 7000 casualties. But thanks to the massive rehabilitation and rebuilding exercise launched by the Japanese government, the economy recovered rapidly and many Japanese stocks reached new highs. There is no reason why such a rapid economic recovery cannot be repeated in the current scenario.
Globalized Nature of Japanese Companies
While it cannot be denied that the earthquake and the tsunami have severely damaged Japan’s factories and ports, the fact that most Japanese industrial houses have largely shifted production outside Japan is a saving grace. Most Japanese companies own manufacturing facilities in Asia and Europe and a significant proportion of their manufacturing output has always come from outside Japan. So while the earthquake/tsunami may have damaged Japanese industry to a considerable extent, they will rebound very fast as most of their production capacity is intact.
The Rebuilding of Japan
The earthquake and the tsunami that followed it have caused significant damage to the infrastructure of Japan. A significant proportion of Japan’s roads and railways have been destroyed and over 125000 buildings have been damaged or destroyed. Additionally, a large number of cars have also been destroyed. Once the nuclear reactor issue is dealt with, the Japanese government is expected to launch a massive rebuilding program. This program will focus on basic infrastructure, power and the reconstruction of destroyed residences. This means billions of dollars worth of business for the beleaguered Japanese industry, especially for infrastructure companies, companies involved with power generation and distribution and even car makers. The stocks of such companies can be expected to outperform in the medium to long-term and currently make for great bargain buys.
The natural disasters that struck Japan have led to a massive repatriation of Japanese money from other countries; which in turn has led to a strong rally in the Japanese Yen. A strong Yen has always negatively impacted the performance of the export-based Japanese economy. As the Japanese government prepares to assess the damage and start rebuilding Japan, it is expected to take on huge amounts of debt which will lead to a decline in the value of the Yen vis-à-vis other major currencies. Moreover, the Japanese government is expected to announce tax-cuts and other stimulus measures to put the Japanese economy on the path to recovery. This will guarantee that the Yen remains soft for a long period of time. A weak Yen will make Japanese exports cheaper to the rest of the world and will result in greater sales and earnings growth for Japanese companies. Consequently, Japanese stocks will outperform going forward.
Companies linked to the Japanese economy
The earthquake/tsunami has also negatively impacted the stocks of foreign companies that derive a significant chunk of their revenue from Japan. These companies are bound to recover rapidly once the rebuilding of Japan begins and its economy improves. The stocks of such companies have been hammered mercilessly in the past few weeks and they represent a great value buying opportunity as they are expected to outperform going forward.
The natural disasters that have struck Japan present a great opportunity for value investors to add world-class Japanese companies to their portfolio at rock-bottom prices. At the same time, investors should apply the fundamentals of value investing and assess each company on an individual basis before taking the final decision.
Find out how you can take advantage of this opportunity staring in your eyes at our Value Investing Foundation Workshop. For the first time ever, we are revealing a company that we have personally invested a huge stake in during this time. – Value Investing Foundation Workshop