Global Equity Strategy - View From The Road: Tokyo - Citigroup

Global investing has become an increasingly detached profession. Given vast financial databases and instant news access, many key decisions are made thousands of miles away from the markets they impact. For those needing a little local colour, a phone call to a regionally based broker or analyst is easy enough.

While we global strategists can run our valuation models, attempt to forecast EPS, and come up with some recommendations from afar, sometimes that isn’t enough. Sometimes you just have to go there. Japan is one of those places right now. We took a flight (80% full incidentally) to see Citi clients and colleagues in Tokyo last week. This short note is a simple summary of our observations from that trip.

It’s tough to be positive if you’re Tokyo-based The first point is that Tokyo is still shaking, quite literally. While activity levels are generally falling, there are still around 10 aftershocks each day. And these aftershocks would be meaningful earthquakes elsewhere in the world. For example, just last Monday there was a 6.6 magnitude quake. To put that into context, the earthquake that devastated Auckland in February measured 6.1.

The fact that these aftershocks are not causing Auckland-style destruction is, of course, testimony to the extraordinary level of architectural preparedness. However, we could see that that the continual shakes were having a more damaging impact upon investor sentiment. It’s difficult to focus on the value in the Japanese equity market if your office building is literally shaking. Add to that the increase in the crisis level of the Fukushima Daiichi power plant to a Chernobyl-equivalent level 7 and it’s perhaps easy to see that the mood of Tokyo-based investors is still very edgy. And with power outages likely to limit air conditioning, it’s likely to be a long and uncomfortable summer.

This helps us to understand why most of the post-quake buying is coming from overseas. Ongoing aftershocks provide Tokyo-based investors with a regular reminder of the significant challenges that face the Japanese economy and corporate sector. That’s what keeps them cautious. More distant foreign investors have been buying for some time. The earthquake has not put them off. If anything they seem to buying even more.