The effects of the tsunami in Hishonomaki, Japan. The nuclear element of the country?s disaster may be an impediment to a quick recovery.PHILIPPE LOPEZ/AFP / Getty Images
Even as the pain and suffering from an unprecedented series of calamities mounts in Japan, strategists predict market turmoil will soon subside based on investors' reaction to previous natural disasters.
From earthquakes to cyclones, major cataclysms tend to jolt markets but not derail them.
"Barring a hit on a major financial centre, these events tend to have a short-term impact," says Robert Sneddon, president and founder of CastleMoore Inc., a portfolio management company in Oakville, Ont.
Desjardins Securities market strategist Ed Sollbach looked at eight major natural disasters over the past 22 years in countries with big economies. "The impact on the overall stock market seems to be minimal," he concluded.
The maximum decline on the S&P 500 one week after a natural disaster was only 1.3 per cent. That drop occurred after a cyclone in September, 2004, that caused $19-billion (U.S.) in damages in Florida and Texas. The biggest drop on the same index after one month was only 3.2 per cent, following the earthquake in Sichuan, China, in May, 2008, which killed almost 88,000 people.
On average, however, the S&P has actually gained 0.7 per cent one month after a major natural disaster, Mr. Sollbach found.
Energy stocks tend to do well after a disaster, with the TSX energy index up an average of 3.4 per cent after 21 days. Gold has also proven a smart bet, with the average return registering 2 per cent in the first 21 days. Even insurance companies, bearing much of the brunt in this week's selloff, have done better than expected. Gains for the TSX insurance sector averaged 1.9 per cent in the 21 days after a disaster, he noted.
"Our examination of previous large disasters indicates there is little overall market impact, and suggests energy and gold are often two of the best-performing sectors following a large disaster," Mr. Sollbach wrote in a research report published Tuesday.
The latest disaster in Japan includes several unique elements. In addition to the crisis at a series of nuclear reactors, the country has been struggling for more than a decade with anemic growth and deflation. Japan's Nikkei index, which dropped almost 11 per cent on Tuesday to 8,605 points, is still well above its low two years ago of 7,173.
"If we can get through this without getting back to the low of 7,100, then this could be ... the thing that shakes Japan out of 20 years of deflation," says Mr. Sneddon, who thinks Japan's currency will keep gaining value in the short term.
There is some support for this scenario, based on the idea that greater government spending could raise Japan's core inflation rate back above zero. If the Bank of Japan reacts forcefully to the disaster, implementing a round of asset purchases similar to the Federal Reserve's quantitative easing program, inflation could rise, helping Japanese companies boost revenue once again, said Pierre Lapointe, global macro strategist at Brockhouse & Cooper Inc.
After a 6.9 magnitude earthquake hit Kobe, Japan, on Jan. 17, 1995, the yen rose 20 per cent against the U.S. dollar over the subsequent quarter, noted CIBC World Markets economists Peter Buchanan and Emanuella Enenajor. The rise followed the repatriation of funds by insurance companies and others to pay claims and fund reconstruction.
Japan's economy bounced back in the months following the Kobe quake. GDP growth in 1995 and 1996 averaged 1.9 and 2.6 per cent, above the long-term trend, the CIBC economists reported.
"While it could take somewhat longer to recover from the latest quake, the same general pattern should hold, with the near-term drag being offset by a lift to growth in the second half of 2011 and 2012, as repair and reconstruction efforts begin in earnest," they wrote.
Still, analysts warn that the series of disasters in Japan - a major earthquake, followed by a tsunami, and explosions at the Fukushima Daiichi nuclear complex - lack any historical equivalent.
"The nuclear element might amp up [volatility]" Mr. Sneddon warns. "Nuclear adds to the sense of alarm. We look back at the debt problems in Greece, Ireland and Portugal and it looks like mother's milk in comparison."