Taking stock of natural disasters

AT A GLANCE MARCH 2011

For investors concerned about the impact of natural disasters on economies and stock markets,
history is our best guide. Estimates vary but the scale of devastation we have seen points to the
economic cost of the Sendai earthquake being equivalent to the Kobe earthquake (Jan 1995)
and Hurricane Katrina (Aug 2005); both ended up costing in excess of $100 billion dollars.

Impact of natural disasters on stock markets Worries about problems at

nuclear power stations have
elevated fear levels and this
110
remains the situation’s key
“unknown”.

100 Natural disasters tend not to

have a long-term impact on
Rebased to 100

the stock market - both the

90 US and Japanese markets
recovered almost all of their
lost ground within 3 months
80 (in US$ terms).
Kobe earthquake (Japanese mkt)
Sendai earthquake & tsunami (Japanese mkt)
The impact of Katrina on the
Hurricane Katrina (US mkt)
US S&P Index was relatively
70
small in comparison to the
1 11 21 31 41 51 61
sharp fall in the Nikkei.
Days after the event

Source: Thomson DataStream, as at 15.03.2011. All returns in US dollars. Sendai data Includes 16 March close.

1 This is for investment professionals only and should not be relied upon by private investors
 The underlying situation is quite different
AT A GLANCE MARCH 2011

Comparing this situation to Kobe, there are two important differences to note. At the time of the Kobe earthquake, global
economic growth was slowing and Japanese institutions had significant balance sheet issues. Today, in contrast, global
economic growth is recovering and Japanese companies generally have significantly stronger balance sheets.

Crucially, the Japanese market was much more highly valued in 1995 than it is today – a price-earnings ratio of 53 times,
according to Nomura, compared with just 14 times today.

JAPANESE STOCK MARKET IS MUCH LESS EXPENSIVE

250
Kobe earthquake: Index Sendai earthquake: Index “My view is that a worse-case scenario has
valuation - 53 times valuation - 14 times
very quickly been priced into markets. In the
200 very short term the focus has been on the
impact on GDP and consumer spending. In
150
terms of markets, the more lasting impact is
likely eventually to come from the much
looser fiscal and monetary policy that will
100 now be implemented. The Bank of Japan
has already printed a huge amount of new
money and liquidity conditions will be highly
50
supportive.”
Trevor Greetham, Director of Asset
0 Allocation and Head of Multi-Asset Funds
Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10

Source: Thomson DataStream, as at 15.03.2011 in US dollars. Valuation data, Nomura.

2 This is for investment professionals only and should not be relied upon by private investors
 Investors should remain calm and take a longer-term view
AT A GLANCE MARCH 2011

The market reaction to natural disasters tends to operate on a worst-case scenario basis. The Japanese market fell
over 15% (in US$) in the aftermath of the earthquake, with stocks being sold indiscriminately (apart from the
construction sector) before recovering some ground.

Most global funds tend to be very structurally underweight Japanese equities, given the poor performance of the
economy and stock market over the last two decades.

Some commentators believed the cyclical outlook for Japanese equities was improving prior to the crisis. While the
near-term picture is now more volatile due to the impact of the earthquake, the medium-term outlook is favourable as
Japanese equities are expected to benefit from additional liquidity and infrastructure rebuilding efforts.

The impact of the Kobe earthquake at $102.5 billion was equivalent to 2.5% of GDP. However, the growth outlook in
emerging markets and the US remains the most important driver of the global economy and a negative GDP shock for
the Japanese economy is considered unlikely to be enough to push the world economy back into recession.

Natural disasters rarely change the course of the underlying economic cycle. If anything, the policy response from
Japan in addition to loose US policy could lead to an even stronger economic pick-up.

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3 This is for investment professionals only and should not be relied upon by private investors