Global Market Turmoil
Recent events, from geopolitical unrest in the Middle East to the earthquake and ensuing tsunami in Japan, has reminded us just how interconnected we are in this global world. The scenes from Egypt, Libya, and now Japan have captured the world’s attention and concern. The nuclear reactor risks in Japan have made a major disaster, possibly even more severe.
But before we speak to the investment landscape that is still rapidly unfolding, we extend our deepest sympathies and prayers to the Japanese people for the loss and challenges that lie ahead.
The Japanese Economy is the third largest in the world behind the United States and China. When building a diversified global portfolio, we select investments in major regions of the world, including Asia, Europe, and emerging economies. While we believe Japan plays some role in a diversified portfolio, we previously under-emphasized the island nation primarily for two reasons. One, we believed the economic growth rate of Japan was slow, as it has been for nearly two decades and two, we felt other areas of the world offered better opportunities for global investing. As a result, the international portion of portfolios opportunistically emphasized Germany as they lead Europe in the economic recovery. (Moving forward, we expect little impact to their export based growth.) We also emphasized hedged global positions focusing on convertible bonds in the U.S. and other international countries excluding Japan as a more defensive position. With those two themes, combined with other core international holdings, it created a lower than normal direct exposure to the Japanese market. That being said, we are closely monitoring the situations abroad as they develop and remain prepared to react to further deterioration or opportunity in the investment landscape.
We have some expectations long-term based on the experiences of other countries and the resiliency of the Japanese people. Despite a slowdown in economic activity in the near-term, the reconstruction efforts will likely accelerate economic activity eventually. Fiscal and public debt will increase due to emergency spending and already low interest rates will be maintained to ease monetary policy in the wake of extraordinary times. After two decades of slow economic growth from a multitude of issues in Japan, Friday’s disaster can create political unity, even stronger nationalistic pride, and infrastructure spending that ultimately pulls Japan from a slower growth economy to the fast growth market we have come to know from the 1970’s and early 1980’s. This is often akin to the re-building phases after major wars of developed advanced countries.
We believe much of the sell-off in world markets was created from fear, grief, and pessimism. It is our expectation that as the world heals from recent events, we will likely move from pessimism to optimism, and focus on growth once again as the markets were expected to a mere few weeks ago. We always remain focused on current events but never at the expense of missing the forest for the trees.
As always, if you have questions, please do not hesitate to contact your dedicated team at Fragasso Financial Advisors.
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