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Home > Outlook Arena > Views On News > March 15, 2011 - Effects of Japan tsunami on Indian stock markets

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Effects of Japan tsunami on Indian stock markets

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disaster strikes some part of the world, we see business media predicting gloomy days ahead for the world stock markets. This time we already came through a few sensational headlines like, 'Japan Tsunami rattles world stock markets'. True, that the earthquake was devastating for the people of Japan but it may not really mean depressing times for the Indian stock markets or the Indian economy. Here are a few parameters that will help gain perspective to assess the impact of this event. Impact on Indian Stock Markets Generally when we refer to the Indian stock markets it typically means the Indian indices - Sensex or Nifty. These indices basically are weighted averages of selected stocks from different sectors/industry. So to understand the effect of the earthquake and tsunami in Japan on the Sensex, we need to understand the exposure of Sensex companies to Japan. The main sectors having exposure to Japan are Autos and Information Technology. But the effect on companies should not be too significant. Impact on Indian Economy Consider this: - India's trade with Japan is just 2% of India's total foreign trade. - Exports to Japan are half of imports from Japan. With this information in mind, the impact on the Indian economy prima facie looks negligible. Impact on Crude Oil Japan is third largest consumer of crude and consumes around 4.3 m barrels a day of crude oil. World crude oil consumption is 85 m barrels a day. Due to the catastrophic earthquake, few of the refineries in Japan have been shut due to fire. Bloomberg report suggests that Cosmo Oil's and JX Nippon Oil shut down its refineries totaling a production of 742,000 barrels a day of crude oil. Other refineries may also follow suit depending on the damage. This may lead to decrease in temporary demand for crude oil and may lead to softening of crude oil prices. What after earthquake? The aftermath of earthquake will spur demand in reconstruction activities, buying new cars, healthcare and consumer products in Japan. But this comes

at a price. The reconstruction activities like ports, roads, rail, and airports among other will have to be paid off by the government of Japan and that can weaken its economy further. Plus there would be a huge psychological impact that also comes into play. We are in no position to forecast the actual impact of this episode on India but we can surely say that be very cautious when you next read a sensational headline like 'Japan Tsunami rattles world stock markets'. Although this may cause a temporary blip in the stock markets, what matters is the scenario from a long term perspective. And this looks positive, given that India's growth story remains on track. This means that any correction in prices should be looked upon as an opportunity to pick up good quality stocks if the valuations are right.

A massive 10 magnitude quake hit the northeast coast of Japan on Friday , shaking buildings in the capital Tokyo, causing many injuries, at least one fire and triggering a four-metre (13-ft) tsunami. However, India Tsunami Centre says there are no local alerts yet in wake of Japanese quake. Nikkei average closed down 1.7% at 10,254.43 points after the earthquake struck. Harendra Kumar, Head-Research, Centrum Broking said, The earthquake in Japan has obviously prompted a negative sentiment in the market. Thats the reason Sensex is going down. However, the economic impact of such natural calamity is yet to be assessed. Such assessment may give fresh trigger to the markets. Sanjay Dutt of Quantum Securities also feels that the calamity in Japan may have a domino effect in India. Dutt said that the crisis is unlikely to erode much from the Indian shores, apart from affecting exports and oil. Echoes Deven Choksey, KR Choksey Securities that the crisis may not have a direct impact on Indian economy and business. However, the Japanese crisis may have a far reaching effect on Indian auto components company. "Commodities may get affected as crude prices will come down. Sectors like insurance and auto will face disruptions," Choksey. As a stratgey, Choksey advises investors to wait before taking out money from the market. Karun Mutha of HSBC Invest Direct warns that if Nifty breaks 5400 levels, then there might be some panic reaction to cover those positions and this would in fact result in either hedging. In such a situation when there is a panic breakdown, the best way to cover is go and hedge by selling short position or leading short position on the index futures. This makes more panic and the market may stream down further with that view, Mutha added. Sangeeta Purushottam, Market Analyst said that the direct impact on India is not necessarily going to be very high but it damages sentiment at a time equity markets across the region are dealing with a whole set of uncertainties. Purushottam advised, You could still protect your portfolio because while we have seen valuations come off quite a bit from the higher levels that they had reached towards the end of the year. A downside possibility of about 8-10% would still exist. Vibhav Kant Upadhyay, Chairman, Indian Center Foundation also believes that Indian companies are unlikely to be affected as most of them are based in Tokyo or Osaka and both the cities are not

affected by Tsunami directly. Japan is well equipped with the situations of earthquakes upto the magnitude of 9 or something like that but most of the damage is because of the Tsunami, Upadhyay added.