March 14, 2011 / 8:28 AM / 8 years ago

European shares hit 3-month low on Japan disaster

LONDON (Reuters) - European shares hit a three-month closing low on Monday on worries about the economic impact of Japan’s earthquake on growth and demand, though some analysts said equities had the potential to recover soon.

Roads and rail, power and ports have been crippled in Japan and it scrambled to avert a meltdown at a nuclear plant after an explosion at one reactor, with the cost of the disasters estimated at about $170 billion. Japanese stocks slipped on Monday, wiping $287 billion off market capitalization.

The FTSEurofirst 300 .FTEU3 index of top European shares finished 1.2 percent down at 1,109.38 points, the lowest close since early December. The index has fallen 7 percent since hitting a 29-month high about one month ago.

Don Fitzgerald, fund manager of European equities at Tocqueville Finance that manages $2.2 billion, said the market was witnessing a lot of sector rotation as short-term traders tried to make money from the tragic events in Japan.

“(The disaster is) another slight negative for 2011 economic growth. The reinsurance sector is under pressure as the quake could well wipe out a big portion of the sectors’ earnings this year,” Fitzgerald said.”

“Anything related to the nuclear sector is under pressure as traders bet on tougher regulation. At the same time the renewable sector is in favor as the other side of the trade.”

Utilities fell the most, with the sector index .SX6P down 2.1 percent. E.ON (EONGn.DE), which gets 41 percent of its 19,000 megawatts of German power generation capacity from nuclear, fell 5.3 percent as Germany cast doubts about the future of its nuclear industry and Switzerland put on hold some approvals for nuclear plants.

However, shares in renewable energy companies were in demand after Japan’s problems. SolarWorld SWVG.DE rose 13 percent and Nordex (NDXG.DE) gained 17.8 percent, with volumes touching 634 percent and 600 percent of their 90-day daily average.

RISK APPETITE FALLS

Investor appetite for risky assets such as equities fell, with the VDAX-NEW volatility index .V1XI rising 8 percent to its highest in more than three months.

Some market experts said European equities’ limited decline following the disaster indicated that stocks had the potential to bounce back soon. Valuations were not extremely low but still more attractive than in the U.S. market, they said.

Europe's STOXX 600 index currently trades at 10.8 times one-year forecast earnings, below a 10-year average of 13.6, according to Thomson Reuters Datastream, and against a ratio of 13.1 for the U.S. S&P 500 .SPX.

“Despite the Japanese market falling back quite sharply overnight European markets have today been somewhat more restrained. We do not believe that the events in Japan this past week provide a case for overall caution on equities,” said Howard Wheeldon, senior strategist at BGC Partners.

“The resourceful Japanese will find new solutions to whatever problems they face very quickly and within weeks Japan’s industry will be all but up and running again.”

In Europe, the STOXX Europe 600 Insurance index .SXIP fell 2.1 percent, while reinsurers Munich Re (MUVGn.DE) and Swiss Re RUKN.VX fell 3.4 percent and 4.5 percent respectively on estimates the quake could cost the industry nearly $35 billion.

Banks, however, gained as European policymakers surprised at the weekend by agreeing to bolster a bailout fund for the troubled eurozone countries.

Greek banks .FTATBNK jumped 8.7 percent as investors welcomed the improved bailout terms for Greece, while the Thomson Reuters Peripheral Eurozone Banks index .TRXFLDPIPUBANK was up 3.8 percent.

“What’s happened in Japan is awful, but for us closer to home the bigger issue now is what’s happening in Europe,” a head of institutional trading at a London-based investment bank said.

“Any dip is a buying opportunity.”

Additional reporting by Josie Cox in Frankfurt; Editing by Greg Mahlich

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