THE damage caused by the natural disasters that hit Japan – the earthquake and then the tsunami – is estimated at $250bn, the highest ever anywhere in the world.
Disasters such as these leave their mark on financial markets and usually also create a few opportunities for the wide-awake trader.
Those aren’t always the same – so that’s why you have to start learning from the beginning again every time and which you’ll hopefully not forget next time.
Over the first two days following the disaster the Nikkei 225 – Japan’s most comprehensive share price index – fell by 6% and 10% respectively.
The total loss in value just of shares on the Tokyo Stock Exchange exceeded $300bn. More wealth was destroyed in the market over those two days than by natural forces.
Of course, the sharp fall in Tokyo spread to other stock exchanges and the total loss of value on those alone totalled trillions of US dollars.
The immediate reaction of my “personal broker” was: “Buy copper, steel, cement and all other commodities that will be used to repair the damage.”
His focus was on shares such as
Anglo American [JSE:AGL], but its price had in any case fallen by around 15%, from R396 to R340/share, over the previous few days.
Anglo also has a particularly large beta, which means its share price tends to rise and fall relatively more than the average on the market.
It’s a good choice in any case, but I think my broker’s focus is wrong.
Though the physical damage caused by the natural disasters is $250bn I’d prefer to focus on the financial damage: the fall in share prices, where the recovery could be much quicker and without using cement, steel and especially copper.
The very sharp fall in Richemont’s share price along with the earthquake offered me a better opportunity.
Japan is a select market for
Richemont Securities [JSE:RCH], with up to 13% of its income and profit derived from that country. Other producers of luxury goods have even greater exposure to that market.
In brief, Richemont’s exposure to the physical damage in Japan is definitely less than Anglo’s.
However, Richemont has a greater direct exposure to the wealth due to the fall in share prices. In any case, Richemont’s price also fell back sharply recently from 4 200c, and it was available on the JSE at 3 600c/share just after the earthquake.
Its fall, and therefore its recovery opportunity, is more or less the same as for Anglo. I just prefer to put my bet on the stock exchange to create wealth again rather than on the long process of building new houses and bridges: that is, the Anglo route.
The gold price did nothing. In fact, it even fell after the earthquake. That’s a new lesson – or perhaps the confirmation of an old one.
The gold price doesn’t rise after natural disasters but it definitely does after those caused by human factors – such as 9/11 and, especially, the collapse of the world’s financial markets after the subprime credit crisis.
That’s quite logical.
After a tragedy – when people stand together to help one another – the markets don’t reward someone who hoarded gold somewhere and may now start using it to his own advantage.
However, in a man-made financial crisis that’s quite acceptable.
Nor is the price of copper – the indicator with a doctorate in economy – telling us a new economic revival is on the way, despite the extent of the damage in Japan.
At the most, it seems as if the copper price might have been held up somewhere for a while.
That’s another lesson from which a lot can be learnt. Large, voluntary spending – such as in the United States over the past few years – can help to get an economy on the go again.
Spending on repairing the damage after a natural disaster isn’t done to stimulate the economy.
A recent survey among economists in the US showed the current instability and rising trend in the price of crude oil as the greatest threat to growth for a now nervous world economy.
And yes, the oil price is much more closely linked to the West’s efforts to get rid of Libyan leader Muammar Gaddafi than to a disaster in Japan.
Incidentally, that huge piece of land on the map called Libya only has a population of around 6 million. It must be virtually impossible to carry out a population census there, let alone wage a war.
Whatever the future holds for the Middle East and the Arab nations, experienced traders agree those represent a far greater threat to the oil price, the global economy and share prices than the spinach leaves in Japan now showing slight signs of radiation.
Let your investment decisions be guided accordingly.
* This article was first published in Finweek.
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