The spate of disasters that have been experienced by this region of world so far in 2011 seem extraordinary. As an investor it is prudent to consider the impact of such disasters on your investments and indeed your approach to investing. The following is taken from the latest Quick Client Update sent out to clients of the firm:
Japanese Quake Aftermath for the Global Economy
- History suggests that natural disasters usually lead to short term disruption only
- Countries have historically gained economic benefits from the corporate and government rebuilding efforts following natural disasters
- Japan has long ceased to be a major contributor to global output
One impact of globalisation is that disruptions in one corner of the world can have major ripple effects across financial markets and commerce worldwide.
Natural disasters are just one of these disruptions. The scale of immense human suffering seen in Christchurch and Japan is difficult to watch on TV, but we must be cautious of allowing our emotions to cloud our judgement on how these disasters may impact on investment portfolios.
For economies and financial markets, history suggests that natural disasters usually lead to short term disruption only, due importantly to the resilience of business and consumer confidence in those parts of the countries not directly affected by the disaster.
These households have traditionally avoided going into an extended period of mourning and reduced spending. Nor have the boards of national corporations suddenly decided to cut back business investment or employee hirings in the face of the disaster.
To the contrary, countries have historically gained economic benefits from the corporate and government rebuilding efforts following natural disasters.
Take the January 1995 Kobe earthquake which tragically claimed 6400 lives as an example. In the December 2004 quarter preceding the earthquake, the Japanese economy was experiencing negative economic growth. However, in the first three quarters of 1995, the national economy grew by an average annualised rate of 3.5%. Initially many believed it would take 10 years to recover from the Kobe disaster. In the end, it took less than two years to rebuild all damaged infrastructure. In fact, within 15 months of the earthquake, Japanese manufacturing was back to within 98% of its pre-quake productive capacity.
From a global perspective, Japan has long ceased to be a major contributor to global output. Japan's share of global gross domestic product (i.e. the value of goods and services produced by the economy) is now about 6%, or half that of China or the euro zone. And average annual economic growth since the late 1990s has been a mere 0.8%[1].
The earthquake affected Tohoku region comprises just 5.5% of Japan's total gross domestic product. With Japan's economy operating at below capacity, there is room to do the reconstruction work that will be necessary.
The fact is when bad things happen, markets react just like people do. Fear becomes the predominant emotion. But after the initial panic, a more measured environment starts to emerge - and confidence will return. If we consider the GFC, then 6 March 2009 represents the onset of the recovery when buyers started returning to the market.
There has been much fear around Japan in recent times, but mainly from foreigners. When the EU's energy commissioner, Gunther Oettinger, irresponsibly said on 16 March that the situation in Japan was 'out of control' and that in coming hours there could be 'catastrophic events', world markets fell by $430 billion in 15 minutes[2]. No such events occurred, and Oettinger later admitted he had drawn his information partly from media reports.
In response to such events, the Japanese foreign ministry simply asked foreign diplomats and government officials to remain calm and 'accurately convey information provided by Japanese authorities concerning the [nuclear] plant'.
Following is a link to a publication written by investment manager - Dimensional Fund Advisors - providing a perspective on disasters looking at three major events in recent history and how they as a firm manage their portfolios during such events.
Hearts and Minds - A Perspective on Disasters
Concluding thought - We cannot predict when buyers will return to the market, but we do respect how markets work and we choose to work with markets, not against them.
[1] Australian Financial Review 14 March 2011 - David Bassanese page 19
[2] The Economist, Buttonwood, 16 March 2011
