The devastating earthquake that rocked through Japan's Kobe industrial region last week will have long-range positive effects for institutional investors in the country.
Money managers say that while the loss of life and devastation of manufacturing and transportation resources caused by the earthquake will result in short-term havoc, in the long term, infrastructure and residential rebuilding will boost the Japanese economy. International money managers are divided on just how strong the economic stimulus will be or how long-lasting its effects may be.
While most international managers are not changing their overall portfolio weightings to Japan, many are evaluating individual stocks within Japan and surrounding countries, seeking companies most likely to benefit from reconstruction efforts in Kobe and its surroundings.
The housing, construction, materials manufacturing (steel, cement, plate glass), raw materials importers (especially of timber), telecommunications and power generation sectors are the expected winners.
"There are two stages of reaction to an event like this," said Anthony Craig, international investment manager at Strong Capital Management Inc., Milwaukee. "The knee-jerk reaction has sent people out to buy a lot of obvious plays, like construction stocks. Other stock plays seem to be examples of 'broker opportunism,' like the somewhat ghoulish suggestion I heard to invest in funeral homes."
In the long-term, Mr. Craig considered the earthquake "not a serious negative. There will clearly be a stimulatory effect as the huge amount of rebuilding gets under way."
Strong Capital has not made any moves yet from the 16% weighting given Japan in its Strong International Stock mutual fund before the quake but is shopping around for strong opportunities, particularly in the forest products industry, because the Japanese prefer wooden houses.
Mr. Craig did not think the earthquake, which had a 7.2 magnitude, will have a long-term negative effect on the Japanese economy or equity market. "I think over time, the affects of the quake will be muted. The Japanese people are extremely resourceful and I don't think it will be long before they are able to bounce back. It would have been a very different situation if Tokyo had been hit," he said.
Alan McFarlane, managing director of Global Asset Management's institutional division, London, said the earthquake has not changed the firm's views on Japan. The firm has nearly $1 billion of its $8 billion under management invested in Japanese stocks.
Mr. McFarlane also said it is tempting to look at Japanese construction stocks. While it is clear reconstruction will be done, he said it's "an open question" as to what profit margins will be.
Richard Allison, director, Jupiter Asset Management, London, said he is taking profits on some Japanese construction stocks as prices have risen as much as 25% in some cases, although he believes the pricing is an overreaction since the quake. Public works stocks had been underperforming before the quake, as the government's previous economic stimulus story had gotten old, he said.
The selloff probably will bring Jupiter, which manages a little more than 4 billion ($6.3 billion) in assets, to a neutral position, but he has no plans to rush back into the Japanese market and will wait to see if good opportunities develop. Mr. Allison declined to name stocks, because he is still selling.
Mr. Allison also believes the positive effects on the Japanese economy have been overblown. "We don't tend to see this as a major macroeconomic event."
Nigel Barry, a director at Dunedin Pension Fund Managers Ltd., Edinburgh, also believes the rise in public works stocks is creating a profit-taking opportunity. Dunedin manages 5 billion ($7.85 billion) in assets.
Railroad and bridge construction stocks should be the main beneficiaries, he said.
Dunedin's holdings include Sho Bond Construction Co. Inc., which rose 15% in two days; Mr. Barry says the manager would sell into strength. Also, Kinden Corp., an affiliate of Kansai Electric Power group, is involved in power distribution, and has shot up about the same level.
Mr. Barry also questioned what level of profits would be available to Japanese construction-related firms. Last year's quake in northern Japan also led to quick awards of contracts, but profit margins were not good.
He also agreed the quake will not have a major impact on the Japanese economy. The Japanese government's signaling that it will pick up much of the costs of reconstruction led to some initial weakness in the bond market. But even if costs total 3 trillion over the next couple of years, that will amount to an additional 2% to 3% of government spending, he said.
"This is a blip in terms of the financial markets," Mr. Barry said.
The Teachers Insurance and Annuity Association-College Retirement Equities Fund has been making opportunistic buys in Japanese suppliers of building materials, such as steel, plate glass, and plywood, as well as in construction companies, said Amy Kong, second vice president and the head of the Asian investment group. She did not identify stocks recently purchased. She added TIAA-CREF will not make significant changes to the 35.4% weighting assigned Japan in the international portfolio as a result of the quake. Japanese equities account for 7.8% of the fund's total $55.8 billion equity portfolio.
To make up for expected shortfalls in raw and building materials, managers expect companies in neighboring Asian countries that export timber, cement, steel and other building materials to Japan to profit from the rebuilding boom in the Kobe region.
Additionally, money managers expect a nationwide movement by many Japanese householders and businesses to make structural reinforcements to older buildings. Many people have been sobered by the devastation that hit Kobe, a region not generally thought of as being particularly vulnerable to serious earthquakes.
Michael Thomas, a director in charge of Japanese investment at Martin Currie Investment Management Ltd., Edinburgh, said his firm is focusing on Japanese house-building stocks. Martin Currie had reduced its house-building stocks early this year because of strong gains in 1994, but Mr. Thomas thinks such stocks have been oversold and could see a reasonable bounce back. He is looking at stocks such as National House Industrial and Sumitomo Forestry Co. Ltd.
Martin Currie manages 3.5 billion in assets, one-seventh of which are invested in Japanese stocks.
Some managers believe the earthquake's clean-up efforts will provide precisely the jolt the Japanese economy needed.
"We are quite bullish on Japanese equities," said Michael Perelstein, managing director for MacKay-Shields Financial, New York. The earthquake could lead to a "tsunami wave" of investment in Japan, as international managers take notice of the economic growth taking place there, and reassess their allocations to emerging markets, he said.
Following news of the quake, MacKay-Shields boosted its Japanese allocation to 40% from 30% in its international portfolios, moving assets from cash and other world markets, he said.
In addition, the firm boosted its midyear forecast for the Nikkei 225 index to 24,000 from the investment firm's pre-quake estimate of 22,000.
The earthquake "essentially put Japan on ... a strong recovery path," he said.
Ian Wright, a director in charge of Japanese equities at Foreign & Colonial Management Ltd., London, agreed the quake's aftermath gives more hope for an economic recovery. Up to now, the Japanese haven't had a common theme with which to work, he said. Now, the prospect of another earthquake will provide an important psychological boost, he said.
"If you are going to look for a catalyst for the Japanese economy to recover, this could be it."
This story was written from reports by Christine Philip, Paul G. Barr and Joel Chernoff.