Great value on offer as appeal for calm triggers panic attack
The sight of Japanese prime minister Naoto Kan dressed in his blue-grey emergency overalls and appealing for calm triggered a full-blown panic attack in financial markets yesterday.
Investors concluded that if the prime minister was asking people not to panic, then the radiation leak at the damaged Fukushima nuclear plant must be more serious than they thought. With no further prompting needed, they ran howling for the exit, dumping Japanese shares as fast as they could.
By early afternoon, Japan's main Topix stock index had plunged 14 per cent - a fall which pushed the market down to a massive 21 per cent below its level immediately before last Friday's earthquake (please see the first chart below).
The selling was largely indiscriminate. It made sense for investors to unload their holdings of Tepco, operator of the Fukushima power plant, which duly fell by 25 per cent.
Dropping the shares of insurers was also sensible. And you can make a case for selling the shares of manufacturing companies like Toyota - down 7 per cent yesterday - whose operations will be affected if Japan suffers a prolonged period of rolling power cuts.
But some of the selling made little sense at all. It was a mark of the depth of yesterday's panic that traders and investors also marked down the stocks of companies likely to benefit handsomely when Japan embarks on its reconstruction programme.
Take Komatsu, Japan's leading manufacturer of heavy construction equipment. Although the company has one hydraulic equipment plant in Fukushima prefecture, its main operations are located outside the affected Tohoku region. Yet at one point yesterday afternoon, the stock was down 18 per cent. And although it later recovered some of those losses, at the end of the trading session it was still down by 5 per cent compared with its price immediately before the earthquake struck last Friday.
Komatsu was not alone. Steel, glass and cement companies were all marked down even if their plants have sustained no significant damage. Investors even dumped construction companies. For example, Obayashi, which soared following the Kobe earthquake in 1995, slumped 12.5 per cent yesterday.
At one point yesterday, the construction and materials subsector of the Topix index - a roll call of the companies set to gain most from reconstruction - was down by 15 per cent on the day. And although the sub-index rallied again in afternoon trading, it still closed almost 10 per cent below its level on Friday before the quake hit.
It will take a brave buyer to step into the Japanese market while the picture at the Fukushima nuclear plant is still so unclear. But barring a catastrophic deterioration, it surely will not be long before some investors begin to reason that yesterday's panic was overdone, and that there are now some compelling bargains available, especially among construction and building materials company stocks.
No doubt sceptics will point out that after a brief rally following the 1995 Kobe earthquake, construction sector shares failed to hold their own. Three months later they had given back all their gains and were trading by 5 per cent below their pre-quake prices.
But there is a big difference between the situation now and following Kobe. In 1995, the Japanese market as a whole looked expensive, with a price to earnings ratio of around 45. Today it is cheap.
Even before last week's earthquake, analysts and fund managers were getting excited about the valuations available in Japanese stocks.
Now Japanese stocks are looking even cheaper. Yesterday the Topix was priced at just 12 times earnings.
After yesterday's falls, Japanese banks - the least leveraged in the world - were trading at 0.6 times the book value of their assets, cheaper even than at the very depth of the 2007 financial crisis.
And the construction and materials sector also looked as if it was priced for liquidation, at a price to book value ratio of 0.8.
Considering that Japan still has a vast reservoir of savings to tap into to fund reconstruction, and given that experience of past natural disasters teaches that affected economies tend to rebound in a V-shaped recovery, it will only be a matter of time before investors decide that at current prices the Japanese stock market looks like the buying opportunity of the decade.