We have seen a significant number of Natural Disasters across the world this year, starting with the floods in Queensland and now the earthquakes in Japan. Below I have a brief update from our research team on potential economic impact of the Japanese earthquakes.
Which essentially says that putting aside the personal tragedies such as we are seeing in the media these types of events can provide a stimulus for the economy.
Outside of natural events this year has continued where last year left off. The major impact on the Australian Stock market last year was Federal Politics, (meaning the Mining Tax and resulting axing of Rudd), international sovereign debt ( meaning the debt crisis beginning with Greece, which we all managed to get through) and the US printing money with a resulting rise in the Australian Dollar which is great for travelling, buying foreign cars and negative for foreign investors.
This year again we have a Carbon Tax, International unrest in the Middle East and I am sure over the months we will be reminded that Europe still has to pay back its debt.
From local investors position we remain cautiously optimistic. Growth is slower than we have seen over the last 10 years, but unemployment is around 5% which is low by both historic and global measures. In other words we think there will still continue to be short to medium term volatility, however the underlying Australian economy is in great shape and the cream of businesses will rise to the top.
If you have any questions or concerns please don’t hesitate or call me.
Japan Disaster 3/14/2011 9:43 AM
The disastrous events in Japan will no doubt dominate market sentiment this week. The Bank of Japan (BoJ) has brought forward the usual policy meeting to this morning with the Governor of the Bank saying that he stands ready to pump in massive amounts of liquidity, although with already massive amount so liquidity and zero rates, we do not see any real practical impact from such action.
Whilst the initial attention of this tragedy must centre on the immediate impact of the lives and livelihood of the people affected, we highlight the following initial points regarding the potential impact to markets:
- There is likely to be liquidation of some funds by the Japanese Earthquake Reinsurance and insurers in Japan to fund the earthquake. They probably would have invested some of their funds outside Japan to avoid the negative correlation risk between their liabilities and their assets.
- We think none of the Australian insurance stocks that we cover are likely to be directly impacted in a material way by this catastrophe, but we don’t believe that this presence is of any significance.
- If reinsurance rates do harden, there may be some short-term adverse impact on Suncorp Group (SUN) due to the likelihood of harder reinsurance negotiations in June.
- There also may be a further issuance of bonds by the Japanese government to fund their liabilities. Companies in Japan and individuals in Japan may be bearing a significant proportion of the financial costs of the events (not to mention the human costs).
- While the Japanese earthquake is a human disaster, and will no doubt disrupt economic activity and push riskier asset classes down in the immediate term, this does not make us bearish on future growth. The rebuild from this catastrophic event could create price inflations in Japan, a potential positive that hasn’t been seen in the country for a number of decades.
- Agricultural impacts from the disaster could lead to further food price inflation as the affected areas of Japan had significant input to food supply, in particular rice.