The major investment themes for this year, according to a report from MLC Investment Management, were meant to be the ongoing “muddle-through” global recovery, sovereign debt blues and China’s slowdown. The risk of asset bubbles in Asian equity and property markets, and in commodity markets and economies, were also highlighted. But this was before March. MLC’s note was current enough to forecast the impacts of the summer floods on the Australian economy, but not the civil strife in the Middle East. Nor the 9.0 Richter Scale earthquake and tsunami that devastated parts of northern Japan.
When we went to press, the full impact of the tragedy was unclear: the death toll was nearing 3,700 and expected to rise, fears of nuclear meltdown were rife and millions were displaced and without power, food and water. This immediately rattled equity markets, but funds managers BlackRock and Franklin Templeton were quick to issue commentaries that held out hopes for Japanese equities and bond yields in the long-run. PIMCO’s CEO, Mohamed El-Erian, said reconstruction efforts would, in time, help the nation’s economy recover, and that its Government’s ability to borrow money at low interest rates was a plus.
The president of global equity manager Causeway Capital Management, Harry Hartford, said many Japanese businesses would be hurt because they typically rely on domestic suppliers, many of which will be out of business for some time. The nation’s large network of regional banks would also be impacted, but this should leave the three majors – Mitsubishi UFJ, Sumitomo and Mizuho – relatively safe. Outside Japan, the nuclear scares will likely boost oil and gas prices while doing the opposite for uranium, and global reinsurance businesses will be hit by the big claims to come. These shocks from the latest macro blindsider came after investors grappled with rising oil prices, caused by unrest in the Middle East, and watched the muddling US, UK and European economies for signs of rising inflation. Ever since the 2008 financial crisis and the strong policy response, investors have been dealt a series of macroeconomic shocks, from Dubai and Europe’s debt woes to this year’s set of social and natural crises. The volatility has come thick and fast.