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The devastating human and economic toll from Japan's earthquake and tsunami has jolted world markets, but top U.S. hedge fund and money managers see a bittersweet buying opportunity in companies ranging from American auto companies to small- and mid-cap Japanese stocks. Japanese stocks on Monday posted their biggest daily decline since October 2008 as traders considered economic losses in the world's third largest economy. The Nikkei index closed off 6.2 percent and the broader TOPIX index slumped 7.5 percent. A cautious and defensive investment stance is warranted because a prolonged slowdown in Japanese consumption in the food, retail and service sectors is likely due to electricity disruptions, Credit Suisse said in a preliminary analysis of the disaster. But investors may benefit by exposure in sectors such as construction, metal products or construction materials, where reconstruction demand can be expected over the near term, Credit Suisse added. U.S. hedge fund and institutional investors including Doug Kass, Martin Sass and Charles de Vaulx have staked their positions ahead of Japan's rebuilding. Before the quake hit, International Value Advisers, manager of IVA funds, had called small- and mid-cap Japanese stocks one of its favorite investment themes for 2011 because of low price-to-book values. IVA "added to a few positions last night," said de Vaulx, co-portfolio manager of IVA, although he declined to say which companies. Japan was IVA's second-biggest country allocation after the United States in its Worldwide Fund, at 14.1 percent at the end of January. Astellas Pharma Inc and Secom Co Ltd were two of its top holdings. Kass, founder of hedge fund Seabreeze Partners in Palm Beach, Florida, said the destruction of existing Japanese automobiles and the closing of automotive manufacturing plants in Japan make General Motors and Ford Motor the best investment idea to come out of the disaster. Numerous sectors in the economy are still operating well below long-term trend lines, which bodes well for pent-up demand in the automotive sector, Kass added. U.S. auto sales surged 27 percent in February, the best month since August 2009, when the government's "cash for clunkers" program spurred a short-lived boom. But the annualized rate remains below pre-financial crisis levels. The global economic recovery will support aggregate growth in the months ahead, although numerous non-traditional threats remain a cloud over intermediate-term growth, Kass said. Weakness in insurers MetLife Inc and Prudential Financial Inc provides a buying opportunity as the two companies are expected to post strong return-on-equity in coming years and trade near their tangible book value, said Sass, founder of hedge fund M.D. Sass in New York, which has $7.5 billion in assets under management. "We don't invest directly in Japan, but we like two stocks that are particularly under pressure now -- MetLife and Prudential -- because they are most exposed to Japan, with 25 percent and 41 percent of earnings, respectively, coming from Japan," Sass said. Prudential fell 2.9 percent and MetLife 2.4 percent on Monday. Sass said the Japanese devastation and the turmoil in the Middle East are resulting in near-term investor caution, but he still believes the equity market is in the early stages of a secular bull market that began in March 2009. Cheyne Capital is one of Europe's largest credit derivative portfolio management groups with a team focused on fundamental credit analysis to determine relative value in credits.
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