Speculators circling - to do Japan a big favour

PUBLISHED : Sunday, 20 March, 2011, 12:00am
UPDATED : Sunday, 20 March, 2011, 12:00am

Jittery investors dump stocks amid nuclear fears in Japan

SCMP headline, March 16

Ishall have to get my disclaimer out on this one first. I own a line of Japanese stocks including an insurance company, a Tokyo property company and the national broadcaster. They have never done particularly well for me and I would like to see their share prices go up.

Thus, if you wish to say that I am only talking my own book when I argue that the panic in Japanese securities is overdone, well, please don't report me to the Securities and Futures Commission. They believe all bad things they are told about people who say anything on investment.

In defence, I can only plead that I have my money where my mouth is. I haven't sold and I don't intend to do so unless, of course, I receive orders from a higher authority (yes, dear).

Look at the chart of Nikkei 225 daily closings in 1995. Can you pick out the date of the great Kobe earthquake that year?

That date was January 17 and, yes, the chart does show a subsequent one-week correction before the market rallied again. But the greater malaise of the market that year was due to a multi-year (one might now even say multi-decade) reluctance to face the hard truth that for many years investment capital in Japan had been badly misallocated and artificially overpriced.

You may tell me it is different this time. There was no danger of a nuclear disaster in 1995, no huge tsunami damage, and not quite such ramifications across a worldwide supply chain.

All true. The problem with trying to assess the effect of natural disasters on financial markets is that both disaster and market differ so much from one to the other and, fortunately, it does not happen very often.

But while I am no expert on tectonic plate movements and uranium fuel rods, I do know a little about the media and I can confidently tell you that it is not the media's way to underplay a disaster story. I'm not saying this one is overplayed. I am only saying you can be confident that it is not underplayed.

And I do know a little about financial markets, having worked for 18 years in the stockbroking business. What I know tells me that the worst acts of damage to any country's financial framework are invariably not acts of God but rather self-inflicted by the financial agencies of that country's government.

It wasn't earthquakes or floods that brought Asian markets low in 1998 and 2008. Natural disasters are rarely as disastrous to a financial market as are conceited finance ministers and central bankers who toy about with things they don't understand.

This is not to deny that a great deal of property was destroyed in Japan or its value now threatened by nuclear contamination. The losses are clearly enormous.

But human beings have always proved themselves a resilient species in the face of setbacks. Somehow we get it together in such times much more than we do in normal circumstances and the extent of the recovery then amazes the pessimists. How exactly it happens every time I cannot tell you but I am confident that it will happen again. I'm keeping my Japanese stocks.

And there are much greater optimists than me around. In normal times they are widely scorned but they come into their own in times like these. I am speaking, of course, of those great villains - speculators and hedge fund managers.

I hear them already, calling out that Japan was cheap even before share prices tumbled in Tokyo after the earthquake and that you will never have such a buying opportunity again. These people do not just keep the stocks they own. They will buy more.

In doing so they will provide the Japanese market a great medicinal dose of what it now needs most - confidence. They will probably make a good deal of money for themselves too in the process and in my view they will deserve every cent.

Unfortunately, they cannot bring the Japanese market what it also needs over the longer term - a government that is willing to make unpopular decisions on its revenues and expenditures, that will stop piling up debt and then wasting it on things its people do not really need.

And this poses the risk that we may still see a repeat of the post-Kobe experience on Japan's markets - a swift recovery from the shock and then a steady march downwards again.