I write this article as the horrific aftermath in Japan keeps unfolding. The Nikkei was down over 10 per cent on Tuesday (having slid more than 12 per cent intra-day) – that’s the third largest decline in history. The third explosion at the Fukushima nuclear plant has raised fears of extensive radioactive contamination.
Politicians are pleading for calm – almost always a trigger for public panic. The markets, run by human beings, (although some dispute the nomenclature post the banking debacle), are naturally prone to knee jerk reactions.
I have already seen speculation as to whether this will mean the third “lost decade” for Japan.
In terms of hard data, JP Morgan reports that the affected regions are home to 4.5 million, and account for 3.5 per cent of national GDP.
JP Morgan adds that it is near impossible and inappropriate given the human tragedy involved, to come up with any clear assessment of the economic impact – but that, in itself, is justification enough for the markets to come off sharply. For investors it is better to be able to quantify terrible news, rather than not be sure.
As an aside, it is rather quaint to see an investment bank yielding to sentiment – I wonder if the assessment would have still been deemed inappropriate if the economic impact could be clearly assessed.
Perhaps that is slightly uncharitable, but I have seen enough reactions to past tragedies to be left in no doubt that on Wall Street everybody looks out for number one.
Unfortunately, the rule of thumb is that the greater the tragedy, the greater the scope to make or lose money.
As evidence, note that in the immediate aftermath oil was down, on the assumption that aggregate demand for oil would now go down, whilst miners were up, on the assumption that the rebuilding job will require metals).
• Warren Buffet is well known for his views on all that is wrong in typical investor psychology. One of my favourite quotes of his is: “We believe that according the name ‘investors’ to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic’.”
Not that such a problem exists in the local market of course – due to the endemic illiquidity we are long term investors by default, though whether the investments should have been made in the first place is debatable given the shockingly poor returns of so many.
A long term investment is one which rewards patient money, not a short term investment gone bad. Dead money in an illiquid market should never be characterised as an investment, but as an interest free loan with the principal never repaid. It is hardly surprising that bonds are so popular, and new equity issues have dried up. However, this situation is of no benefit to the long term health of the economy. New ventures need access to capital, and that capital should often be in equity form.
• Less well known than Warren Buffett, but even more entertaining, is the chairman of El Oro (listed on the Channels Islands exchange) – C. Robin Woodbine Parish.
Not one to mince his words, Woodbine Parish is happy to share his views on a number of subjects. And share them he does, via his addresses to shareholders, in the process displaying an impressive breadth of knowledge in various subjects including history, economics, politics and religion.
In the latest address, once the mere formalities of reporting on the actual performance of the collective investment vehicle were dispensed with (as it happens the growth in NAV far outstripped the FTSE All Share, 36 per cent vs 17 per cent), Woodbine Parish quotes Thomas Jefferson: “I place economy among the first and most important virtues and public debt as the great danger to be feared. To preserve our independence, we must not let our leaders load us with perpetual debt. We must make our choice between economy and liberty, or profusion and servitude.”
He then observes that the Bank of England deputy governor (Charles Bean), in “wild comments”, is calling for more consumer spending – “an elementary and inherent part of the present problem”.
Indeed, it is hard to square the personal need to save with the economy’s need to spend, in the context of disposable income being remorselessly eroded. In a similar vein, it is hard to reconcile government calls for banks to lend more, with regulator calls to rebuild the capital base and generally revert to a more prudent form of banking. We are not out of the woods yet.
As Mervyn King has stated, people should not simply assume that this recession is like all the recent ones and that we will bounce back as a matter of course.
The root causes are different, the structural issues are all too apparent, but none of the solutions appear palatable. There is no quick fix.
This article has been prepared by Martin Webster, an equity analyst at Curmi and Partners Ltd, and is the objective and independent opinion of the author. The information contained in the article is based on public information. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.
www.curmiandpartners.com
Mr Webster is an equity analyst at Curmi & Partners Ltd.