just out send-tray
From: J
Sent: Thu, March 17, 2011 5:09:43 PM
Subject: Re: Comments - Week of March 14
messages: some-risk-on
possibilities: maybe libya will hold, saudi arabia may not fall, and godzilla and atomic monster 101 may not make appearance
suspicion: perhaps it is time to power-on / initiate "cloud atm" short put on ewj tonight
Permal - Impact and Opportunities in Japan
Permal is one of the biggest hedge fund managers in the world.
JPY Spot 79.13
Economic impact:
· This region represents approximately 7% of the country’s GDP, including the regions where the nuclear power plants are located.
· An economist from the Tokyo Mitsubishi estimates that 2011 GDP will not be materially impacted from this disaster. While the impact from the expected power shortage will have a negative drag on GDP in the short term, recovery spending in the medium and longer term will be positive.
· Judging from the 1995 Kobe earthquake, the recovery spending was about 2% of GDP.
Market impact:
· From a currency standpoint, the JPY may appreciate in the short-term as money will be repatriated back to Japan from overseas, as corporations, especially insurance companies, will need cash. After the Kobe earthquake, the JPY appreciated by 20% over a couple of months (see attached). However, when compared to the Kobe earthquake, the Tohoku region is a less populated and less industrialized region. So the amount that has to be repatriated is probably less. Additionally, the BoJ is well aware of this risk and is pumping JPY 20 trillion ($240 billion) into the markets, which is well above the amount repatriated at that time. So longer term, the JPY may depreciate as recovery spending will put further pressure on the government due to already mounting debts.
· From an equity market standpoint, construction companies will perform well due to future infrastructure needs. On the other hand, financial sectors, notably insurance companies, will likely suffer. Some manufacturers will also suffer due to property damage and the closure of production facilities. However, other regions, including Tokyo , were not severely damaged by this earthquake; thus, their operational impact should be relatively limited. As expected, Japanese equity markets, as a whole, sold off heavily for the last two days. The Nikkei is down -16%.This is clearly creating opportunities at the sector level. For example, J-REITs were down -14% for this period, even though only 1% of their assets are in the region and properties in Tokyo are hardly damaged. Small-cap companies sold off even heavier, as these companies don’t have much analyst coverage and investors just wanted to reduce risk assets. The TSE 2nd Index was down -19% for the last two days. (Mar 14-15)
Bigger picture opportunities that we are thinking about and we came up with a list of 4 things that we are doing research on:
· The first has to do with the nuclear reactor situation. There are going to be opportunities in the uranium and nuclear sectors as we move forward. We don’t think this is the end of nuclear power and the best analogy we can point to would be the gulf oil spill and deepwater drilling last year. That was not the end of deepwater drilling and this likely will not be the end of nuclear power. So we get these massive selloff’s but eventually these things comes back and if you look at the deepwater drilling stocks from last summer, they have recovered a lot of the lost ground. So one of the areas we are doing research on is how to play this theme of uranium and nuclear power.
· The second theme we are looking at is the insurance industry. What typically happens after you have natural disasters is you have losses by the insurance and re-insurance industry, they sell off significantly, but then pricing power comes back and you end up seeing margin expansion. So we are doing research on Hurricane Andrew, Hurricane Katrina, and the Kobe earthquake to see what happens to the insurance sector post these events and how far after these events happen does the pricing power/margin expansion come back.
· The third opportunity that it creates is in energy. If you look at the Natural Resources sector, one of the only commodities that was up last week was Natural Gas. Natural Gas is the marginal commodity used in the production of electricity. So with the shutdown of many Japanese nuclear power plants last week, you saw a rise in demand for Natural Gas, so we’re looking at the natural gas names to see who is going to benefit from that.
· The last opportunity that we are thinking about within all of our portfolios is Japan . Given how much Japan (Nikkei) has sold off in the last 2 days (-16% to -17%) and we are looking at events like September 11th, Kobe earthquake, and Katrina to determine when that bottom comes and when the outperformance comes. So we are looking for the best time to increase our exposure to Japan .
IMPACT TO GLOBAL GLWOTH
· What is occurring in Japan in the short term will slow global growth and we have seen that in the flight to safety over the last couple of days (oil and gold have sold off, the USD and Treasuries have strengthened). We believe oil will remain a major factor for what occurs to global growth. If you have an all out configuration involving Saudi Arabia and the Middle East , we believe oil will go to $140 or $160 and you will see demand destruction and significantly slower global growth. The key transition mechanism to the Permal portfolios is not exposure to MENA itself, but rather what does oil do to global macroeconomic conditions. |
