Dear Reader,

Last week I said the ‘oxygen’ the JSE All Share index needed to start a fresh assault on its 33,000 ‘peak’ was a round of improved earnings. But events beyond our control have put paid to any chance of reaching new highs over the short-term. The ‘bad weather’ has set in and there won’t be any chance for an ascent for quite some time (to keep our mountain climbing analogy going…).

What happened?

• Friday,11 March 2011 a massive earthquake struck 130 kilometres east of Japan.
• Hours later a 10 metre high tsunami tore into the coastline destroying everything in its  path and surging upwards of 10 miles inland.
• Two of Japan’s nuclear power stations were severely damaged by the earthquake and subsequent tsunami – and one of these plants suffered a series of explosions through Monday and Tuesday panicking investors with the prospect of a total meltdown and possible radioactive fall out.
• On Tuesday, the Japanese stock market tumbled 1015 points to register a 10.6% single-day fall 

And the chaos went global...

You cannot blame investors for taking swift action...

As the earthquake, tsunami and subsequent nuclear disaster ripped the heart out of Japanese stock market, uncertainty knocked other markets with a merciless domino effect. The FTSE 100 shed 80 points (1.4%), the German DAX plummeted 3.2% and stocks in Hong Kong shed 2.9%. At the time of writing the US market looked set for a substantial fall too. Why?

Japan is a critical cog in the global growth machine. The analysts were quick to point out the disaster will knock Japan back into recession – and this means its major trading partners will feel the pinch. Companies that rely on Japan’s manufacturing sector, their engineering expertise and their consumers (luxury good companies rely heavily on Japanese discretionary spend) are going to suffer severe short-term reductions in revenue

Investors – already toying with the idea of moving into “safer” asset classes – were quick to sell equities, wherever in the world they were invested. I expect Japan’s contribution to global GDP is what caused the JSE to stutter too. The All Share index shed 685 points to 30194. A quick look at the graphs confirms this is the worst closing level since 1 November last year… To make matters worse overall returns on the JSE now look certain to enter negative territory for Q1 2011.

Among the biggest losers were South Africa’s resources and financial sector shares… But the worst sell-off was among the oft-touted uranium miners… First Uranium and Uranium One shed 20% of their value on Tuesday! It seems the tenuous situation at the Japanese nuclear reactor has led to global condemnation of nuclear as a power source, with investors dumping uranium as a result.

My comment on this “dump the out-of-favour stock” behaviour is this: There are thousands of nuclear fuel stations around the world, with thousands more in various stages of development. I don’t think the world will drop this form of power, nor will demand for uranium disappear, overnight.

In the mean time I have a great defensive share to consider...

You money shouldn’t go up in smoke in this share...

I reckon there are going to be plenty of speculators rushing back into the markets over the next couple of days – hoping for a quick rebound as the situation in Japan normalises. They might make some money – but it’s a highly risky tactic. It would only need the nuclear disaster to escalate, or a second earthquake / tsunami to cause more panic selling.

If you have to go into the markets this week then it makes sense to stick with something defensive – a company which should quite happily carry on trading whatever natural disaster strikes. British American Tobacco (JSE: BTI) is just such a share. Although it hasn’t offered much by way of capital return in recent months investors can rely on it for consistent Sterling-based dividends, forecast at nearly 6% for this year.

I think buying something like British American – at around R260/share – is among the safest investments you can make for 2011.

That’s it for this week. I’ll have another MoneyMorning instalment for you on 24 March.

Until then, let the profits roll,

Gareth Stokes