Japan Roils Global Markets: What's an Investor to Do?

Jittery traders sold pretty much everything Monday as the tragedy in Japan roiled global markets, but longer-term investors were looking at the move as a natural pullback likely to create opportunities.

Shares in Tokyo dropped following the deadly March 11 earthquake and tsunami
Yoshikazu Tsuno | AFP | Getty Images
Shares in Tokyo dropped following the deadly March 11 earthquake and tsunami

Energy and utility stocks droppedon a belief that the earthquake and tsunami would hit industrial demand. Luxury stores got walloped on concern that high-spending Japanese consumers would change their ways. Insurers took a beating as estimates of damage swelled to as much as $34 billion.

The financial effects from the Japanese crisis sent many to the sidelines, looking for a continuation of a pullback and an opportunity to add to positions once the recovery process begins.

"There's no catalyst to the upside, so any bad news is going to hammer the market," said Nadav Baum, executive vice president at BPU Investment Management in Pittsburgh, Pa. "As far as our market is concerned, we were headed into the correction phase, anyway."

But Baum believes investors worried about what global turmoil will do to the markets should stake out positions relevant to what the world economy faces—focusing in particular on oil and natural gas that will be needed to replace the lost nuclear energy production in Japan.

"You've got to look at the whole energy world," he said. "If that shuts down for a while, what are they going to use? That means oil goes higher, natural gas goes higher."

In addition to energy, agriculture and base metals will be needed as Japan recovers, said Oliver Pursche, of Gary Goldberg Financial Services.

"We think all of this is going to very inflationary," Pursche said in a CNBC interview. "We won't go so far as saying this is going to be good for the economy. On the contrary, we think it's going to deteriorate the growth that we're seeing around the world. But it's certainly going to continue to be inflationary."

Stock market investors thus far have been myopic, boosting the US market on Friday but selling Mondayafter a volatile and ultimately brutal trading day in Asia, where equities lost more than 6 percent.

Losses were spread about the spectrum, but among industries within the Standard & Poor's 500 it actually was luxury retailers like Coach and Tiffany that stuck out. Among the other big losers for the day was General Electric as investors worried about its future considering the backlash against nuclear energy.

"There's no question that this is a big event," said Gary Anderson, co-portfolio manager for the Scout International Fund. "This is a once-in-a-century event and there's going to be a lot of turmoil in Japan for a number of quarters."

But Anderson thinks the reaction from investors will lead to oversold conditions in big-name companies including Honda and others.

Sam Stovall, chief equity strategist at S&P, said investors actually ought to be consoled at the US market's resiliency amid all the global shocks.

"While we acknowledge that we are in a period of elevated risk, we still believe the S&P 500 is undergoing a digestion of the recent eight-month advance, rather than the start of something worse," Stovall said in a note to clients.

Stovall said the firm is sticking with its 12-month projection of 1,400 for the S&P 500, recommending a neutral weighting for global equities, underweight for bonds and overweight on cash.

The currency tradehas been the topic of much speculation, centering on a belief that the yen could strengthen against its rivals as money is repatriated to the country to pay for damages. Monday trade saw the yen gain against the US and Australian dollars but slip elsewhere.

Analysts at Bank of America Merrill Lynch said that while the short-term trend might be for the yen to get stronger, the trade eventually will return to normal and the yen likely maintain its traditionally weak standing as monetary policy loosens during the rebuild.

"[T]he medium term inflows are unlikely to lead to significant (yen) strength from current levels, particularly given the risk of intervention," the firm wrote in a research note. "We continue to expect the (US dollar-yen trade) to enter a moderate upward trend by the middle of the year."

Still, the near-term volatility sent some traders packing until the market gets a clearer direction.

"The sidelines seem the most attractive place to be this morning and we abandoned all positions Friday as the news was breaking regarding Japan," hedge fund manager Dennis Gartman wrote in his daily newsletter. "They seem even more so (today)."