ISX safe from Japanese fallout

So far the Japanese earthquake, tsunami, and nuclear disaster have had surprisingly little impact on emerging markets. While the Nikkei is down 13% since the quake (as of March 17), the MSCI emerging markets index has fallen only 3%. And in Iraq, Rabee Securities’ RSISX is actually up 0.4%.

Emerging markets could continue to slide, however. The main risk comes from the possibility of a global liquidity squeeze as Japan repatriates funds to finance reconstruction efforts. Post-quake moves in the yen:dollar exchange rate may be an early warning sign. The yen rose over 3% to levels around the post-World War II record high of 79.75 (reached in April, 1995) before being pushed back above 80 by the Bank of Japan's March 18 intervention.

This is one risk that ISX investors do not have to worry about, however. As most of the trading is still local, there just isn’t much foreign money to be pulled out. And the few foreigners in the market appear to be mainly individuals and dedicated country funds. The former are unlikely to be directly affected by the availability of yen-denominated financing. And the latter will generally be committed to staying fully invested and have lock-up periods of at least a year. Most will have only begun raising money last year, which means few of their investors could redeem now even if they wanted to.

Of course it is also conceivable that the crisis in Japan could trigger a global economic slowdown, which could potentially impact the ISX via the oil price. But while a downturn in the world economy would lead to slower growth in energy demand, it would almost certainly be accompanied by an increase in the share of fossil fuels in global power production. In the short term, Japanese demand for diesel can be expected to rise sharply as homes and businesses turn to generators to make up for electricity shortages. Longer term, a shift away from nuclear power to oil and natural gas is practically guaranteed, not only in Japan but in other countries as well. The net effect of the quake on the Iraqi economy is ambiguous and could even be positive.

Of course none of this is to say that the ISX is a safe place to put your money. My point is simply that, as long as there's not much foreign participation, the fallout from events overseas is likely to be limited.

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