07/04/2011 - 00:00

Crisis reveals quiet investor confidence

07/04/2011 - 00:00


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Despite ongoing environmental and political upheaval around the world, there’s still reason for confidence.

LIKE waves, the negative news continues rolling in.

There’s the back-and-forth war in Libya, widespread unrest in the Middle East, rising fuel prices, and sovereign debt woes across the European Union.

Should Bahrain and Saudi Arabia fail to maintain stability, the world oil price will resume its upward trek towards $200 a barrel.

Economist David Hale, in a recent interview on the ABC’s Lateline program, predicted an eventual fall in Chinese demand for Australian raw materials.

He said he anticipated increased iron ore tonnages from Chinese-Australian joint ventures in West Africa, leading to future price declines.

The Japanese people remain in deep shock, suffering extraordinary difficulties due to the massive earthquake, tsunami and ongoing crisis at the Fukushima nuclear power station.

Japan, as the world’s third-largest economy, is a vital supplier of parts and capital equipment for major essential sectors such as computers, electronics and automobiles.

While Japan’s manufacturing heartland is fortunately well south of the quake’s epicentre, rolling electricity blackouts and telephone network and transportation disruptions continue to Tokyo’s north-east.

A huge number of multi-national corporations face what are likely to be severe supply delays of Japanese-sourced parts.

The auto-assembling sector relies on ‘just-in-time’ inventory supplies.

US carmaker General Motors has already announced a halt to output at its Louisiana truck plant.

Although Honda and Mazda have now resumed limited production at several Japanese homeland factories, industry analysts say it may take several months before plants have returned to full production.

Scotia Economics senior economist Carlos Gomes has estimated that production losses will reach 500,000 vehicles due to Japan’s car assembly shutdowns.

Tyres and other parts shortages have already struck several Australian resource companies.

The new Apple iPad relies on at least five components from Japanese suppliers, including some flash memory and a thin battery.

Industry analysts estimate little immediate impact, but Apple may face second quarter supply delays.

In Australia, consumer confidence has slumped to its lowest level since the global financial crisis of 2008-09, with local consumers opting instead to save and cut credit card bills.

Debt-laden retailer, Colorado, has slipped into receivership.

According to Myer CEO, Bernie Brookes: “Customers revert to cocooning when things are uncertain; they feel the need to protect themselves.

“All the disasters have added further to their psyche of saving for that rainy day.”

Due to nuclear fallout and contamination fears, uranium stock prices were hammered and the Japanese Nikkei index fell 20 per cent in four days.

The Australian stock market only fell by 10 per cent, clawing back to suffer only a minor correction that many were expecting anyway.

Sadly, the catalyst for such a pull back was not what people would have wished to see.

But the surprise is not that equities have slumped, but by how little they’ve fallen.

Despite short-term volatility, equities remain in demand.

A study by Ned Davis Research found that, in 19 of 28 of the worst political or economic crises of the past six decades to September 11 2001, the Dow Jones Industrial Average was higher six months later.

The ASX All Ords index has lifted more than 7.6 per cent since March 14, rising by more than 350 points.

Intrepid punters who weighed back into some junior explorers, post-Fukushima, have therefore been quite well rewarded.

However, round-the-clock reporting on the unfolding nuclear drama may make it difficult for new uranium-based resource projects to obtain start-up finance for which there will be little economic basis.

So what is the outlook for investing in Japan?

A clue comes from Berkshire Hathaway’s Warren Buffett.

Speaking to reporters in South Korea, he said: “The country’s record earthquake created a buying opportunity for equity investors.

“If I owned Japanese stocks, I would certainly not be selling them because of the events of the past 10 or so days.”

• Steve Blizard is a senior investment adviser at Roxburgh Securities.



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