The tragic events in Japan on March 11th and the subsequent nuclear reactor problems are presenting difficult challenges. Initial reports indicate that Tokyo and the remaining southern portions of the country did not incur significant damage. However, the northeastern city of Sendai, which accounts for 1.7% of Japan’s GDP, has sustained a substantial amount of damage, the full extent of which remains uncertain.
We are currently in discussions with money managers that invest directly into Japanese companies. Economic activity will undoubtedly slow in the coming months due to the infrastructure damage and limits on electricity usage. However, key manufacturing areas of the country appear relatively unaffected and are expected to resume operations in the next week or two once safety checks are complete. Additionally, the Bank of Japan has injected $86 billion into the financial system to stabilize the Yen and banking industry.
The rise in oil prices before the earthquake was primarily due to speculators through the futures market in anticipation of an expanding global economy. Our research indicated that oil prices were set to decline back towards the $80 per barrel level since demand was not justifying the increase, similar to what we saw in 2008. While Japan will be forced to import additional crude oil to meet its energy needs, it is not expected to drive oil prices higher for an extended period of time.
These tragic events are another reminder of the uncertainty of the future, the need for broad diversification and the importance of maintaining a long term investment philosophy. We expect market volatility to remain high as investors become overly concerned regarding the near-term consequences. Money managers we use are currently putting cash to work during these times into companies whose prices have sold off to indiscriminate levels. In the coming months, investors will have the opportunity to assess companies’ longer term business fundamentals and prices will return to more normal levels. Not unlike what we experienced during the most recent financial crisis.
We will continue to remain in contact with money managers that have significant exposure to the Asian stock markets and will make you aware of any changes to your portfolio that we believe are appropriate. Additionally, we encourage you to call us with any questions or concerns.
Our deepest sympathies go out to all those impacted by these terrible events.