It would be indecent to begin any discussion of the Sendai earthquake without referring to the horrific human toll. Japan is a wealthy country that is uniquely prepared to deal with natural disasters, and the Japanese are extremely resilient people, but the scale of the calamity is without precedent. As someone who has lived in Japan and who has friends there, I strongly urge readers to donate to the relief effort. If you want to find out how to do this effectively, this article highlights several reputable organizations.
With that said, here are three points on the economic and financial consequences of this disaster:
The aggregate impact on the global economy and Japan's is likely to be small
You may have heard that the world's No.1 car company, Toyota
Yes, the economic impact on the region around Sendai, which was hit hardest, will be enormous; however, that region represents less than 4% of Japan's GDP. The Carnegie Endowment for International Peace estimates that "Japan's growth will be slower for a quarter or two... A year from now, the change in GDP level from its pre-earthquake will likely be minimal." Japanese equities already looked pretty cheap before the event; they look only more so now. The iShares MSCI Japan Index ETF
Don't let the market's reaction (short-term) drive investment decisions (long-term)
Many of the short-term market reactions to the disaster we are witnessing now are either wrongheaded or grossly exaggerated. For evidence of the overreaction, you just need to consider General Electric
With $1 billion of revenue, the activity contributes less than 1% of the conglomerate's total revenues. Despite this, the market shaved 7% off GE's market value during the first three days of last week, roughly twice the decline in the S&P 500. That underperformance represents an incremental loss of $7 billion in GE's market value; at 7 times the unit's annual revenue, that would be a hefty penalty even if that business were to disappear altogether.
More broadly, there are 65 nuclear plants under construction around the world today. Three countries -- Russia, India and China -- house two-thirds of that number. Given the nature of their governments (China and Russia) and/or their ravenous hunger for energy (India and China), I don't expect current events to have any adverse repercussions on these projects. Nevertheless, at last week's low price, shares of Cameco
The longer-term impact is unpredictable and adds to general uncertainty
After an initial hiccup, the U.S. market appears to have regained its composure. But there are signs that investors are more skittish than before; that is, if the VIX index -- the market's "fear gauge" -- is anything to go by. Last week, the VIX index spiked almost 50% at one point, while the iPath S&P 500 VIX Short-Term Futures ETN
There are plenty of other areas that could feel the aftershocks of this earthquake, including energy markets. Japan is the world's third largest economy, it's far from energy independent, and it depends heavily on nuclear power for electricity generation.
In the case of oil, the Japanese situation could add to the effect of political instability and push a tight market higher still. For natural gas, it could be a catalyst that reverses sentiment in a market that has been in the doldrums for some time. Either way, investors who own US Oil Fund
Survival tips for investors
When investors come across a Black Swan, we can expect to witness confusion and irrationality at work. Investors are best off not reacting rashly to this (or any other) event. My advice is to seek out intelligent, well-sourced analyses and maintain a long-term perspective with regard to your portfolio. Finally, I don't think it is immoral to consider that events such as these can present investors with opportunity. Investors must make their own decisions, but if you want to help Japan, the best way is to donate money to relief; not investing in Japanese (or any other) stocks does nothing to alleviate the hardship and suffering of those who have been affected.
To track the shares mentioned in this article, click on General Electric, Cameco, US Oil Fund and United States Natural Gas Fund to add them to your watchlist, or start a new watchlist and add any company you want. You'll get valuable updates as well as immediate access to a new special report, "6 Stocks to Watch from David and Tom Gardner." Click here to get started.
Fool contributor Alex Dumortier, CFA has no beneficial interest in any of the stocks mentioned in this article. You can follow him on Twitter. The Fool has written naked calls on iPath S&P 500 VIX Short-Term Futures ETN. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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