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Japanese Market Fears Appear Overdone
Factoring in Tuesday’s 10.5% plunge in Japanese equities, it appears as though the market may be overreacting to the horrible events in that country. We note indiscriminate selling in futures markets, currencies, and equities. For example, the most logical fuel alternative for Japan going forward, natural gas, is dropping instead of rising in price. The Canadian dollar, which should benefit from an uptake in raw materials, is also falling. Considering that Japanese stocks were trading at about 1.2 times book value (compared to 2.3 times book for the S&P 500 index) before the earthquake, we believe the risk-reward dynamic is beginning to shift toward the buy side.
The wildcard is the extent of radiation leaks in the area. At this point, there is no need to assume disaster, though it should be noted that a scenario of this type (four reactors in dire straits simultaneously) has never been encountered. We will monitor and report back as our views are being formed.
About the Author
Ben Warwick, Quantitative Equity Strategies
Veteran investment strategist Ben Warwick brings 20 years of investment management expertise to AdvisorOne.com in his blog, Searching for Alpha. His market and economic insights provide readers with an insider’s view on generating alpha through asset allocation, the use of strategic portfolio “tilts” and alternative investments.
Ben Warwick founded Quantitative Equity Strategies (QES) in 2002 as a platform for implementing his quantitative investment strategies. The firm manages assets with traditional long-only equity and fixed income, private equity, managed futures and alternative investment mandates. QES has developed an industry leading expertise in building investment programs that can replicate alternative returns, while offering daily liquidity and transparency. These products include the HFRq, a hedge fund replication strategy developed in concert with Hedge Fund Research in Chicago; the Managed Futures Beta Index, with Aspen Partners; and the Nomura QES Modeled Private Equity Returns Index (PERI), which was developed with Nomura Bank and Preqin, the leading source of information in the private equity industry.
He is the author of several books, including "Searching for Alpha: The Quest for Exceptional Investment Performance," (Wiley, 2000) and "The Handbook of Managed Futures," with Carl Peters, (McGraw-Hill, 1996). He can be reached at ben@qesinvest.com.
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