What happens when you add a devastating earthquake and tsunami into a simmering cauldron of global events made up of soaring oil prices, political uprisings and climate change? Not much — if you go by the absurdly calm stock market reaction to the recent Japanese events. Stock markets in the developed and emerging world have actually gained 1 to 8 per cent in the last one month, with the Nikkei Stock Average alone losing over 10 per cent.

Indian stock indices were among the top gainers. So why have the Indian markets been so nonchalant and what is the impact of Japan's twin disasters on India?

We answer key questions, based on official data points, analysis by institutional investors and insights from a recent sponsored visit to the Asia Pacific headquarters of UBS.

What happens to global recovery?

Most researchers now seem to be agreed that the demand destruction caused by the disasters in Japan will trim its economic growth rates over the next three-six months. UBS Investment Research predicts a ‘soft patch' for Japan over the next three-six months, with GDP growth for 2011 put at 1 per cent, against its earlier forecast of 1.5 per cent. Morgan Stanley makes a more gloomy forecast that the country could slip back into recession, with its GDP set to contract by 1-3 per cent in 2011.

Despite the divergent near term forecasts, there is a strong consensus that Japan's GDP growth will rebound in the last quarter of 2011 and heading into the first half of 2012, as the resilient nation flags off its reconstruction efforts.

So, from a global perspective, the bottomline: The event was tragic, but does not materially alter the picture of a global economy on the mend. Lower demand from Japan may, in fact, offer a brief breather from rising commodity prices over the next three-six months.

Will capital flee India?

Fears were running high immediately after the disaster about Japanese investors making an exodus from global markets and repatriating capital back home, causing a spike in the yen.

However, Nomura International in its March 17 commentary on the yen outlook, allays some of these concerns notes that investors in Toshins (Japanese funds that invest overseas) may not need to sell funds to raise cash and that “large-scale repatriation of Toshins looks unlikely”. Insurance claims too are expected to be relatively small in the global scheme of things (at $10-15 billion).

For India, in particular, capital outflows due to Japanese investors don't seem to be a big worry. Japanese investors have reduced the portfolio money funnelled into Indian stocks quite sharply in the last five years from a net investments of Rs 8,000 crore in 2005 to net putllouts in 2010. Nor was Japan critical for foreign direct investment flows into India, accounting for just 5 per cent of inbound FDI.

India also has among the lowest trade exposures to Japan in the region, with Commerce Ministry data showing Japan accounting for under 2.4 per cent of India's import and export trade by value in the first six months of FY-11. China, in contrast, sources about 13 per cent of its imports from Japan and ships about 8 per cent of its exports to it.

The import dependence could make China more vulnerable to supply-side disruptions in the short term; conversely, its exports may receive a fillip once reconstruction begins.

Ditto for Malaysia and Indonesia which ship about 10 per cent of their exports to Japan.

Will Japanese investments continue?

Institutional investors also foresee positive outcomes for capital flows from this disaster over the medium term. For one, they argue, this Tsunami-quake event may prompt affluent Japanese investors to more actively diversify overseas. Given that Japan's high net worth investors account for nearly 40 per cent of the wealth in the Asia-Pacific region (holding assets worth $3892 billion), that's likely to have big liquidity implications.

Saying that the disaster could prove a “wake up call” for Japan, Mr Alex Wilmot Sitwell, Co-CEO of UBS Asia Pacific region, felt the crisis could prompt large Japanese corporations to diversify their manufacturing base overseas and unravel the complicated structure of cross-holdings in corporate Japan.

If that happens, India, as one of the most promising consumer markets in the Asia Pacific, may turn out to be a beneficiary. Given that previous India-bound deals from Japan have been sewn up at premium valuations (Reliance-Nippon Life, Ranbaxy-Dai Ichi Sankyo), that's good news for companies in autos, financial services and pharmaceuticals in India.

Inflation will hurt India Inc.

Having said all that, though, inflation is certainly one fallout of the disaster that can hit India Inc hard. Though the disaster has triggered a temporary decline in prices of critical commodities such as oil, coal and uranium from their peaks in February, rearchers warn of a late 2011 or early 2012 spike, as Japanese reconstruction demand feeds into tightly balanced world markets.

With about 8 per cent of Japan's power generation capacity knocked out by the disaster, expectations are for Japan to immediately restore generation by bringing idling gas-fired or oil-fired power capacity on-stream. The impact of additional Japanese demand on global crude oil may be muted, but that on LNG may be sizeable for the region. That's heightened input pressure on user industries such as chemicals, pet-coke and fertilisers, in India.

UBS Investment Research, in its March 25 report, estimates that with both India and China set to rely heavily on imports and mining costs heading up, thermal coal contract prices may be up sharply in 2011, especially if Japan shifts a little away from nuclear energy. The China-India factor will also be at work in the case of steel inputs such as iron ore and metallurgical coal where markets are likely to be in deficit by 2011 and 2012.

For Indian users of these materials — power generators, metal and steel makers — the recent cool off in prices may be a limited window of opportunity to build up inventory of these critical raw materials.

Refining and petrochemical product makers such as Reliance Industries may be among the rare Indian beneficiaries of the Japanese disaster, as the shutdown of key Japanese petrochem capacity, tightens the supply of petrochemicals and packaging materials in the Asian region. While Reliance may benefit through better volumes and pricing power, makers of consumer goods and downstream chemicals — the users — may have to contend with input inflation that is a few notches higher than before.

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