News

Financial markets across the world reacted in the last week to news coverage of Japan's nuclear crisis following the devastating earthquake and tsunami. The initial events caused widespread loss of life and ongoing concern as Japan tries to limit radioactive contamination on top of their other tragedies.
 

Members will be seeking reassurance about the security of their investments. Markets were not only focused on Japan, but also Middle East uprisings and the effect on oil supply potentially curbing the global economic recovery. Australia too is recovering from natural disasters, and the rest of the world has plenty of economic challenges – not least the European government debt problems.
 

Japan remains the third largest economy in the world at around $5 trillion, and any decline in economic activity will be felt globally. Recent estimates of total damage of (conservatively) $235bn* do not translate directly to lost GDP, as there will be some contribution from the reconstruction effort. However, the events are likely to strip at least 1% from Japan’s GDP growth this year. With flow-on effects through interruption of components sourced from Japan, reduced exports to Japan, and effect on financial markets, global GDP could be downgraded by anything up to ½% this year.

Some impact on the global economy is likely to be felt through lost Japanese exports, particularly hitting the price of electronic goods and components that had previously been contribution to keeping inflation low. In the very near term, production will be interrupted, and that has seen LME copper prices fall over 10% at the recent lows with even more severe falls in nickel and, of course, uranium. 
 

The Aussie dollar fell sharply last week, following commodity prices lower and due to the Japanese yen gaining as their offshore investments were returned home. G7 central banks will coordinate an intervention in the markets and keep the Japanese currency from rising further, which would hurt their exports further.
 

Impact on Fund Investments

Japan represents 10% of the global index. However, the funds’ international share managers have been heavily underweight Japan – the total allocation amounting to 0.9% of the International Equities allocation. This is just 0.1% of the fund in Japan. One Investment Manager has exposure to property in Tokyo (WALGSP exposure is approx. $1.25m) which experienced no major damage. The International Index Fund has a $1.2m (approx.) exposure to Japanese Equities. Thus the 20% fall in the Japanese sharemarket has only a minimal direct effect on the total fund’s investments.

 

By far the biggest impact is due to the fallout on other markets – Australian and International shares were both sold off heavily, although at time of writing have recovered somewhat to be down around 3 to 4% in March.
 

While cash rates are likely to be on hold for longer than previously expected, this has been good news for bond investments, which have risen in price due to a “flight to safety” during the month.