Biggest Loss since 1987

Japanese stocks plunged 12% on Tuesday on reports of rising radiation levels near Tokyo and lurched towards their biggest loss since the 1987 crash, in a panic selloff likely to compound the economic impact on the quake-stricken country.

Government bond futures soared after Prime Minister Naoto Kan said the risk of nuclear contamination was rising at the Fukushima Daiichi complex on Japan's ravaged northeastern coast, 240 km (150 miles) north of Tokyo.

Equity futures fell and the yen rallied as risky assets were dumped. The yen steadied soon after, raising suspicion that authorities had intervened. The Ministry of Finance declined to comment on intervention.

In contrast to Monday's trading, when construction stocks rose, none of the 225 constituents of the benchmark Nikkei average gained on Tuesday. The broad TOPIX index of Japanese stocks has dropped by a fifth this week.

"All focus is on the nuclear crisis. In the situation where the crisis appears to be worsening, foreign investors, domestic fund operators are pulling out from Japanese shares," Hideyuki Ishiguro, a supervisor at Okasan Securities in Tokyo.

The TOPIX share index plummeted 12.1% to 743.10, after posting the biggest full-day decline since the 2008 financial crisis on Monday on record volume. The index was on course for the biggest one-day drop since the stock market crash of October 1987.

The Tokyo Stock Exchange's biggest companies have lost about USD 720 billion in value this week.

The Nikkei share average dropped 12.7% to 8,399.97, the lowest in two years.

Shares of Tokyo Electric Power, the owner of the stricken nuclear plant, did not trade, although sellers massed at the indicated price of 1,341 yen on Tuesday, down 280 yen, or 17%, from Monday's close. There were no buyers.

The firm's credit default swap spreads, contracts that protect against debt default and restructuring, were 150/170 basis points compared with 40 basis points on Friday an indication of increasing nervousness about the company's future.

Since the quake, the Japanese government's CDS spreads have widened by more than 20 basis points to 99 basis points, but were still narrower than the record 120 basis points reached in February 2009.

Ten-year Japanese government bond futures rose 0.90 point to 140.83, and hit a new high for the year.

In the cash market, the 10-year yield fell to 1.17%, the lowest since January 2011. The 5-year to 20-year yield curve, or the difference between the maturities, steepened to 159.5 basis points.

"The focus is the steepening yield curve beyond 10-year zones ahead of a 20-year bond auction tomorrow," said Chotaro Morita, head of fixed income strategy research at Barclays Capital Securities in Tokyo.

"Amid a lot of uncertainty, there are possibilities of additional bonds issuance with the supplement budget. Investors including life insurers may back off at the auction," Morita said.

The yen was up slightly at 81.53 per dollar, relatively stable in the face of the equity market selloff. Traders were on alert for signs that Japanese investors were repatriating funds, a phenomenon pushed up the yen in the wake of the 1995 Kobe earthquake.

At one point, the dollar spiked against the yen in volatile trading and dealers suspected the authorities may have intervened in the market. They later downplayed the idea.

The dollar had touched a low around 80.60 on Monday, less than a yen from the record low of 79.75 yen touched in 1995 on EBS.

Hurt Japan in a Big Way

At a time when Tokyo is struggling to curb its huge debt, the earthquake, tsunami and now the nuclear meltdown is sure to hurt Japan’s economy in a big way, says renowned economist Nouriel Roubini. He feels that given the uncertainty over the developments in Japan, people are fearing the worst.

Concerns in Japan are impacting global markets too. "There is an urgent need for transparency; people need to know what is exactly happening. Conflicting reports and no exact information about how bad the situation is, is not going to be beneficial for the confidence of the mass or the market," Roubini, who had predicted the onset of the global financial crisis in 2008, points out.

Also, we are now on the verge of being worried about a nuclear meltdown, and that certainly is not good for business, he states.

To which Paul Sheard of Nomura adds that these kinds of disasters cause a lot of short-term disruption with the GDP being hit and capital stock and wealth being destroyed. But this also leads to reconstruction efforts, capital stock being re-built, and one tends to get a bit of a bounce-back. "Economic recovery may be delayed by a few quarters in Japan on account of huge uncertainty and we would see suppressed growth in the April-June quarter

JPMorgan likes India, China, but wary on inflation

Increasing inflation may be a risk for investors in India, but that market's sentiment-driven volatility can throw up cheap long-term investments for JPMorgan Emerging Markets Equity Fund, which is "overweight" on the world's largest democracy.

"In India, we can find businesses we want to own for a long time, (but) inflation there has hurt in the recent past," JPMorgan investment adviser Thomas Leventhorpe told Reuters.

India's main gauge of prices -- the wholesale price index -- rose 8.3% in February from a year earlier, well above the 7.8% forecast in a Reuters poll.

Despite worries about inflation and infrastructure, the fund's largest holding is in India's Housing Development Finance Corp, at 4.5%.

The fund, which is little more than a decade old, also owns more than 4 million shares in Bharti Airtel, the nation's largest telecoms service provider.

"We have held these for a very long time and we expect to hold them for a very long time in the future. They have a very competitive cost structure and a very large addressable market," Leventhorpe said.

With 21% of its money invested in China and Hong Kong -- the fund's favourite region -- Leventhorpe reckons "China has many opportunities, but also many risks.

"China has done a very good job of containing its economy recently. They are not trying to slow the economy ... they are trying to stop a property bubble."

China Merchants Bank Co Ltd and Ping An Insurance Group Co of China Ltd are among the fund's overall top-10 holdings.

Leventhorpe, who joined JPMorgan in 2007, believes a slower-than-expected recovery in US markets has added steam to investments in emerging markets. He said the fund was "overweight" China.

The MSCI Emerging Markets Funds index rose 16% in 2010 compared with a 13% rise in the Standard & Poor's 500 index.

The JPMorgan Emerging Markets Equity Fund, with more than USD 1.9 billion worth of assets under management, has risen 12%, including sales charges.

"If people are running scared on global investing then that will impact emerging markets," he said.

Underweightsky

The fund is, however, "underweight" Russia. "We don't like the Russian energy sector and that's a large part of the Russian market," Leventhorpe said.

Financials and consumer staples are other fund favorites, with close to half its money in these two sectors.

Leventhorpe said the immaturity of financial institutions in emerging markets, and tight financial regulations in the case of Brazil, were other investment positives.

As an aside, Leventhorpe, who lived in Japan for 3 years, said the earthquake and tsunami there will slow economic growth.

"But the rebuilding can increase economic activity," he said.

Leventhorpe, who travels and plays tennis when he is not strategizing, personally likes Indonesia and Turkey as investment destinations.

Asia knocks 2% off Sensex

Indian equity benchmarks plunged over 2% in early trade on Tuesday, joining the slide in other Asian markets rattled by the news of radiation leaks from quake-hit parts of Japan spreading fast.

The 50-share Nifty index was down 137 points at 5392, and the 30-share Sensex was down 452 points at 17986.

Experts say a massive withdrawal of Japanese money from world markets could be underway, as that country prepares to rebuild.

Japan was the worst hit among Asian markets, down 12%, and other markets like Hong Kong, Taiwan, and China were down around 3-4%.

Back home, automobile, realty and metal shares took a beating, with the respective sectoral indices down between 2-3%.

"The market will not bottom out till the political crisis plays out completely, and consensus earnings estimates for FY12 crack by 200-400 basis points," said Saurabh Mukherjee of Ambit Capital.

RIL, NTPC, HDFC, Infosys lead

Consistent buying in financial, oil & gas, infrastructure, metal, healthcare, technology and Anil Dhirubhai Ambani Group (ADAG) companies' shares was supporting the Nifty to hit the 5500 level. The Sensex too was trading with more than 100 points gains at 11:57 hours IST.

Heavyweights Reliance Industries, NTPC, HDFC, Infosys, ICICI Bank, Wipro and L&T gained 1-2%. Among others, ONGC, SBI, TCS, ITC and HDFC Bank gained 0.4% each.

However, auto stocks like Tata Motors, Maruti Suzuki and Bajaj Auto were on sellers' radar with 1% fall. After the massive 8.9 magnitude earthquake and tsunami on Friday, Japan has been battling hard to prevent a nuclear catastrophe and carry on rescue operations for millions of people without power or water in its worst crisis since World War II. Suzuki is the parent company of Maruti Suzuki, based in Japan.

The 30-share BSE Sensex went up 130 points to 18,304 and the 50-share NSE Nifty climbed 42 points to 5,487. The broader indices were marginally in green today.

India's wholesale price index (WPI) rose an annual 8.31% in February on higher fuel and manufactured product prices, government data showed on Monday. The figure was well above the median forecast for a 7.79% rise in a Reuter’s poll and was higher than the annual rise of 8.23% in January.

Jonathan Cavenagh, senior FX strategist, institutional FX sales, Asia, at Westpac Institutional Bank, Singapore, said, "The data came in stronger than expected, a trend that has been evident in Indian inflation data for much of the 6 months or so."

"Inflation is coming down but not at a pace quick enough for the RBI I would suspect. We have seen Indian equities trade a touch softer after the print but it hasn't been a dramatic move lower. Same goes for the currency. This reinforces our view that the RBI will raise the repo rate by 25 bps this Thursday."

Reliance Capital rallied 6% as Nippon will acquire 26% stake in Reliance Life by investing Rs 3,062 crore. Transaction has pegged Reliance Life Insurance at USD 2.6 billion.

However, Suzlon Enegy was the biggest loser on Nifty with 3% decline.

Breadth was in favour of advances; about 729 shares advanced as against 501 shares declined on the National Stock Exchange.