Expect continuing near-term uncertainty leading to increased volatility for both Japan and the globein the aftermath of the 9.0 earthquake, subsequent tsunami and nuclear crisis that that have wreaked havoc in that country, a paper released Tuesday by Rogerscasey says.
Ultimately, however, these events should not affect global markets long term, and Rogerscasey is not recommending any material changes to asset allocation or portfolio positioning beyond heightened awareness and due diligence, according to Ryan Dembinsky, the author of “Navigating the Unforeseeable: Our Thoughts on Japan.”
The paper discusses Rogerscasey’s views on the effect of the events in Japan on various financial market segments and on portfolio positioning.
Equity markets. It is early days, but the longer-term effects of the multiple disasters on the overall economy “should be less than devastating,” the paper says. At present, it does not recommend distressed selling. However, a dramatic worsening of the situation at the Fukushima Daiichi nuclear plant, with attendant effects on Japanese infrastructure, ecosystems and exports, would change this view.
Fixed income markets. The paper notes that the Japanese bond market was unattractive before the current crisis, and will continue to be so going forward.
Currency markets. The paper says that a flight to quality and unwinding of the Japanese carry trade is pressuring the yen to rise. Longer term, however, this will not persist, the paper says, and some weakening is likely to occur.
Impact on the U.S. economy. With exports to Japan accounting for less than 1% of U.S. GDP, according to the paper, risk is more on an idiosyncratic basis at the company level rather than a systematic risk at the overall economy level. At the same time, the nuclear disaster and Japan’s rebuilding effort may increase demand for oil and other commodities, leading to higher prices in the medium to long term.