Japan earthquakes and investments: Independent investment advice
Posted by Don Martin on Wed, Mar 16, 2011 @ 02:30 PM
The huge Japanese quake may have scared investors, but the real concern that investors should have (but don’t) is that U.S. equities are 70% overpriced according to various indicators such as the Shiller PE10 or Tobin’s Q.
My intuition regarding the quake and the nuclear plant is that eventually things will go back to normal and people will forget about the quake and the risk of nuclear power.
However, regarding buying Japanese equities on a dip, I’m not ready to recommend that because of macroeconomic and demographic fundamentals that existed in Japan before the quake. The Japanese equities have had low Return on Equity which is why Warren Buffett does not like investing in Japan. Japanese publicly traded companies appear to be focused on maintaining employment and sales volume rather than profits. Japan has a long term problem with declining birth rate, no immigration, less entrepreneurial behavior than in other countries and huge debts financed at artificially low rates. (Of course the U.S. also has a big problem with debt).
The problem with “Value” investing is that occasionally investors can get into a “Value trap” where they buy stocks with low PE’s only to find they were low because the company was moving into a worsening situation and thus the company’s share price continues to go down. So the risk of investing in Japan is not the quake but rather the macroeconomic fundamentals that existed before the quake.
Assuming the developed world is in a 17 year bear market then we have another five or so years to go until it ends. Also, after a bad financial crash where deleveraging is needed it takes seven years to return to normal growth rates, according to the book “This Time it’s Different” by Rogoff and Reinhart (This would apply to the U.S. and Europe, not Japan). So if most of the developed world will be weak for some time then this would affect Japan’s economy in addition to its own structural problems that existed before the quake. Specifically I’m thinking that if the bear market can only end by going through a “Capitulation phase” where the SP goes back to 666, then only after that time will the developed world be able to return to a bull market, which will also involve Japan.
So I prefer to sit tight with quality bonds rather than risk a value trap in Japanese stocks.
I have written about the these topics here. This is an example of independent investment advice.