London markets poised for sell-off after earthquake in Japan

Date: Monday, March 14, 2011
Author: Ben Harrington, The Telegraph

Insurers are likely to come under renewed pressure as estimates of the scale of potential claims against them more than tripled over the weekend to $30bn-$50bn (£19bn-£30bn) as the scale of the crisis unfolded. Analysts said as much as £30bn could be wiped off share prices in London as the stock market slumps 2pc.

The benchmark Nikkei 225 stock average dived 633.94 points, or 6.19pc, to close at 9,620.49 — its lowest level in four months. Worries about the economic impact of Friday's disaster, including massive power shortages that could disrupt factories, triggered a broad sell-off that hit all sectors. The broader Topix index was down 7.9pc.

Other Asian stocks markets lost ground. Hong Kong's Hang Seng Index lost 0.4pc to 23,167.99 while South Korea's Kospi was up 0.5pc to 1,965.90. Shares in Taiwan, Singapore, Australia, New Zealand and the Philippines were lower. Benchmarks in Indonesia and Thailand rose. Mainland China's Shanghai Composite Index was down 0.3pc at 2,924.14.

A ban on naked short-selling is being enacted in Japan to stabilise stocks and prevent speculators profiting from the tragedy.

In an effort to shore up markets and banks, the Bank of Japan injected a record 15 trillion yen (£115bn) into money markets to try to defend the already fragile economy. The central bank also funnelled 55bn yen of liquidity to stricken lenders in the northern provinces where nervous depositors were making withdrawals.

Tokyo Electric Power fell 24pc as it struggled with malfunctioning nuclear reactors and a power shortage that led the company to announce rolling blackouts in parts of Tokyo and its suburbs.

Companies with nuclear power-related businesses such as those that build nuclear power plants, registered big losses, including Hitachi, down 16.2pc, and Toshiba, down 16.3pc. Japan Steel dropped 19pc, Mitsubishi Heavy Industries 10pc and Kobe Steel 7.3pc.

Stocks in other sectors also took major hits as investors dumped shares over concerns about economic production and consumption. Car makers slid as northeastern Japan is a major center for auto production, complete with a myriad of parts suppliers and a network of roads and ports for efficient distribution.

Toyota, the world's top carmaker, Nissan, and Honda suspended production at all plants across Japan. Toyota was down 8.6pc, Honda lost 7.7pc, and Nissan dropped 10.7pc. Mitsubishi Motors and Isuzu Motors both lost nearly 11pc.

Insurance companies — many of which will likely face heavy claims for lost property and infrastructure — also suffered sharp drops, including Tokio Marine Holdings which was down 13pc. Cosmo Oil, whose refinery has been on fire since the 8.9-magnitude quake, dived 25.2pc.

David Buik, at broker BGC Partners, said: "With factories shut, this necessary remedial action will adversely affect Japan's economy dramatically."

He forecast a global stock markets sell-off of 2pc, a figure echoed by Douglas McWilliams, chief executive of the Centre for Economic and Business Research.

Questions were posed about Japan's ability to respond, given that the Government is already operating with debts of more than twice the size of the economy and interest rates of zero per cent.

Insurance companies are facing some of the worst losses from the earthquake and tsunami. Risk modelling company AIR Worldwide said the earthquake alone could cost the insurance industry up to $35bn in property claims – equivalent to all the catastrophe costs of 2010 combined and second only to Hurricane Katrina. On top of that are potential claims against the tsunami and radiation fallout.

Many of those losses will be felt by the British businesses that operate in the Lloyd's of London market. Paul Donovan, a senior global economist at UBS, said investors haven't seen this level of political risk in markets for 20 years and won't be sure how to deal with it.

On Friday, shares in some of the UK's largest insurers fell heavily as fears mounted their 2011 profits will be damaged by claims from the Japanese earthquake, which follows February's earthquake in New Zealand. UK insurers are estimated to be at risk of up to $5bn (£3bn) of losses as they account for almost 10pc of the global industry. Hurricane Katrina cost the Lloyd's market £2.6bn.

Chaucer, which is in takeover talks with Guy Hands' private equity firm Terra Firma, could be one of the worst
affected because it specialises in insuring nuclear power plants and is one of the world's biggest insurers of nuclear risk.

Analysts at stockbroker Collins Stewart said Catlin, which is listed on the FTSE 250 index, is likely to be highly exposed to the disaster. Other companies facing losses include Amlin, Beazley and Hiscox. They are also all listed on the London stock market.

A lot of the costs from the Japanese earthquake are also likely to be absorbed by the world's largest reinsurers, such as Munich Re and Swiss Re. AIG, the oldest and biggest foreign insurer operating in Japan, yesterday pledged to pay claims from the earthquake "in a timely manner".

Analysts said radiation claims are unlikely to have much effect on the mainstream insurance business because most insurers have exclusion clauses regarding chemical, nuclear and biological disasters.

Brent crude prices dropped to closer to $111 after the disaster threatened to send the world's third-largest economy into recession, crimping demand for oil. In currencies, the dollar was down against the yen and the euro.