Japan fund manager Simon Somerville is sitting in the Jupiter offices next to Hyde Park less than 48 hours after he fled the devastation in Japan. Although he described the ordeal as a “very lucky escape”, he also said he felt guilty for leaving.
“I felt like I was running away from it all, and I know other foreigners felt the same,” he said. “The Japanese are a fantastic people, and it is not fair that this has happened to them. It’s devastating to think that now they are going to have to go through this really difficult adjustment phase. It’s going to be a difficult couple of years.”
What was your experience of the earthquake?
Japan has a lot of earthquakes, so you get used to them. I was there all last week and we had two or three earthquakes on Wednesday and Thursday which woke me up in the night, but that’s just the way Japan works, they’re not concerning.
The thing about an earthquake is when it starts no one tells you how long it’s going to go on for. The big one on Friday went on for just over four minutes. That was scary, it just went on and on.
I was in a taxi and you’re just watching these buildings swaying left and right, and thinking “any second now they’re going to fall over”.
The initial reaction was relief, because everything was still standing. My taxi driver had a television in his cab, so we switched it on and they started talking about the tsunami. Even now I don’t think we know how many people were lost to the tsunami. People are saying 10,000 but I think it’s going to be a lot more than that.
What was the mood in Tokyo when you left?
It depended who you were talking to. The expat community was scared and had the option to leave, so they left. The nuclear issue only really started on Saturday afternoon, and certainly some people on hearing just got in their car and drove.
The other issue in Tokyo is the shortage of electricity and vital things like water. The mood among the locals is much less hysterical than it is overseas.
I was amazed, when the earthquake hit, at the calmness. People weren’t running around the streets shouting “the end is nigh”, which would tend to be a Western reaction.
There’s a clip on the internet of all these people watching the tsunami hitting, watching it with resignation. There is no wailing. The Japanese knew this was coming. They were brought up with the concept that “the big one” is coming at some point.
Have you had news from Japan?
On Tuesday, prime minister Kan went on television at lunchtime and said there was more risk of radiation and advised people to stay indoors.
The market fell sharply at that and there were queues of people trying to get trains out of Tokyo.
I got an email from a friend in Tokyo saying: “I would be lying if I told you I wasn’t scared. I left the office early last night and stopped at two different supermarkets. They’ve completely sold out of rice, bread and canned goods, flashlights and batteries, and many petrol stations have a lack of petrol and kerosene.”
You have to understand this is very much an east coast situation; once you get to Osaka there’s no issue at all. There’s no impact from the earthquake and there is electricity, as Japan runs two separate electricity systems. Osaka might develop a refugee problem, but there is no panic. It’s very much a two-tier economy going on.
What is your view on the markets?
It’s scary! Because the nuclear issue has the ability to change everything, positively and negatively.
Earlier in the week we felt that Japan was doing everything they could with Fukushima, that there weren’t going to be any significant environmental implications to what was happening.
There is a brand new nuclear plant closer to the centre of the earthquake that we’re told is undamaged, but Fukushima is quite old. If other plants have been damaged then there is a power problem.
After the Kobe earthquake you had two or three months of dip and then a sharp recovery, and actually that’s not bad for the economy as you focus the effort on the right areas.
The most positive thing we could see is if the Fed [US Federal Reserve], the ECB [European Central Bank] and, almost crucially, the Chinese all came out and said: “We want the yen to weaken.”
Which of your fund’s holdings were affected?
The biggest impact is on East Japan Railway. This runs the railway north from Tokyo and we have no final confirmation on the damage on that yet, but that stock has been hit pretty hard. A defensive stock that didn’t really defend.
We also own two stocks that have nuclear exposure. Toshiba, which bought Westinghouse Electric a couple of years ago, and MHI –Mitsubishi Heavy Industries.
Do you see buying opportunities in this?
The initial reaction to an earthquake is that construction companies do well. They go shooting up, but I would be careful of buying into rebuilding names because they are not going to sting the economy to make money, they’re not greedy Westerners. Steel and cement will be interesting sectors.
Before all this, what sectors were exciting you about Japan?
It’s quite difficult to talk about the past now, everything has changed.
We had been increasingly moving into exporters, as we thought the yen was going to weaken. We continue to think the yen is going to weaken, so we probably would stay that way.
Japan has got some fantastic companies, global brand names that make things better than any other people do, whether that’s the car manufacturers, electronic component makers – a big theme for us has been the increased percentage of Japanese components going into Apple products.
Will the surrounding countries be affected?
There will be some countries that benefit massively from what has happened in Japan, because they are competing with Japan. For example, we don’t know much about Toshiba’s facilities yet, but if something has happened, Samsung will benefit.
What do you say to investors who want to give up on Japan?
It depends on your risk tolerance. I can totally understand people saying: “I’ve had enough of Japan.”
That’s all very well when Japan is going down, but you tend to see those same people coming back in when Japan is going up.
I expect some people will give up on Japan, but equally there will be some who see this as a buying opportunity.
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