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European fund management firms were reviewing their investments in Japanese companies Monday but said they are largely sitting tight after Friday's devastating earthquake sparked a 6.2% fall in the Nikkei Stock Average Monday.
As assessments of the damage and the potential for aftershocks from the natural disaster remain "guesswork," fund managers said they expect Japanese stock markets to fall further this week, but that they should eventually bounce back as the medium- and longer-term attractions of the country's companies come back into focus.
Charlie Metcalfe, president at Nikko Asset Management Europe, said his firm's central case is for a maximum 20% fall in the Nikkei, assuming there are no significant aftershocks and no material nuclear problems.
"We think that (fall) could be reasonably short-lived," he said, and could even be followed by a rally from the lows, as the Bank of Japan supports markets with liquidity injections and the government and Japanese companies buy stocks to bring some stability to the market.
A more gloomy, "Armageddon" scenario worked out by Nikko AM has stocks falling more like 40% if an aftershock hit Tokyo or other heavily industrialized areas and there was a significant nuclear plant problem.
The price of oil is also a major wild card in the country's recovery from the disaster, Metcalfe added.
Shogo Maeda, head of Japanese equities at Schroders PLC (SDR.LN), said his firm does "not believe there has been serious overall damage to the business sustainability of many Japanese companies."
He said markets should become more stable once the damage is assessed, and that "the economy should once again return to a recovery track."
Hugh Young, head of equities at Aberdeen Asset Management PLC (ADN.LN), in a note Monday said there has been disruption at some of its holdings, including Honda Motor Co. (HMC), Canon Inc. (CAJ), railway operator East Japan Railway Co. (9020) and chemical company Shin-Etsu Chemical Co. Ltd. (4063.TO), but that "many companies do not know themselves how they are affected because of outages and communications failure."
For the "cynically opportunistic," he sees resource companies such as Rio Tinto PLC (RIO) and BHP Billiton PLC (BHP) benefiting from Japan's need for thermal coal and iron ore to boost its non-nuclear power generation.
"Uncertainty is famously bad for investors; that the Nikkei is 'only' down 6% today may be owing to three things: first, the BOJ pumped in $122 billion to ease liquidity amid fears of short selling--for it and the government, the lessons of Kobe have evinced a textbook response this time; second, money repatriation is good for the yen, and that has been a reason for foreigners at least to buy the market in the past several months; and third, most prosaically, many traders have probably been stranded at home," Young said.
Europe-based fund management firms have played a major role in Japan's revival with global fund investors in the past year or two, as investors in the U.K. and on the continent dipped their toes back into the country, encouraged by improvements in its corporate governance, lower indebtedness at companies and the unwinding of complicated cross-shareholdings.
"(Before the earthquake) I had been long on Japanese exporters and short on the yen. That's where we were at the start of 2011. At last Japan was coming into vogue and attracting retail investors. Over the long term I think that still remains, despite the terrible tragedy currently unfolding, with an improving global economy good for exporters, along with the continued weakening of the yen, which I expect to continue over the next two years," said Tom Becket, a fund manager with London-based PSigma Investment Management.
He said retail investors are bound to be scared off in the short term, though it was too early to assess overall market outflows.
Bill O'Neill, chief investment officer for EMEA at Merrill Lynch Wealth Management, said market falls might actually trigger buying from foreign investors, since Japanese companies "are generating huge amounts of cash flow, operating on improved return on equity and higher margins," in contrast to at the time of the 1995 Kobe earthquake when companies deep indebtedness and weak cash flows sparked a major sell-off.
-By Margot Patrick, Dow Jones Newswires; +44 (0)20 7842 9451; firstname.lastname@example.org
(Digby Larner in Paris contributed to this article.)