Buying Japanese equities when the Topix has fallen some 7.5% would not seem like the brightest thing you will ever do in your investment career or the sort of thing that would endear fellow investors to your wisdom. However, history will show that positioning yourself to be a provider of liquidity to panic buyers and sellers will ultimately pay handsome rewards. However, before you race headlong into buying Japanese equities ask yourself two important questions:
- Are there enough panic sellers?
- Have the long term fundamentals changed and if so have they changed materially?
Let me try to answer these two questions. A 7.5% fall in the TOPIX index qualifies as a market crash. Yes there is certainly panic selling. Furthermore, when every media outlet in town is talking about the Japanese earthquake and/or the fall of the Nikkei by some 6% then I guess it qualifies as an infamous "Black-Swan" event. This in itself suggests a capitulation of the bulls and exhaustion of selling pressure by the bears. Let us not forget that on Friday Japanese equities fell by some 2%!
Have the long term fundamentals changed? I think they most certainly have but contrary to popular opinion, they may well have improved dramatically. There are two reasons for this assertion. First, the massive liquidity injection by the BOJ. Perhaps the tragedy will strengthen their resolve to break the deadlock of the bulls' grip on the Yen. Japanese central authorities now have their backs against the wall. Given the $180bn liquidity injection today by the BOJ, I don't think they will feel anything to resort to QE and follow through on their intervention banter towards the end of last year. The biggest threat to the recovery in Japan now is a strong JPY.
I would not like to go up against a central bank that has the resolve and power to depreciate their currency. Sure there has been, and will continue to be, losses stemming from shutdowns in operations of the big exporters like Toyota (TM), but these losses would quickly be offset by the gains posted on by the depreciation of the JPY.
Secondly, over the coming months and perhaps years, there is going to be a massive infrastructure spending program to repair or replace everything that has been damaged or wiped out in the earthquake and subsequent tsunami, both at a government and consumer level. This spending should be very positive for the earnings of equity markets. It may also benefit equity markets by creating inflation within the Japanese economy, thereby encouraging Japanese investors out of JGBs and into yielding assets like equities.
And what if I am wrong on equities? What if there is further downside to come over the coming days weeks? Well, given that the median price/book ratio of stocks listed on the TSE is 0.69x at the close of business on Monday, it is difficult to imagine that there will be any material downside from current levels.
I was long Japanese equities going into this crash, I have been since the middle of last year. I doubled my exposure today when the Nikkei was down 6%. Judge me by my actions not words.