Uncertainty continues
Regarding the situation in Japan, we believe the news flow will not improve over the next few days, and it is too early to assess the market or economy given the uncertainty of the final outcome in this region. We can, however, put this situation into perspective given short-term market reactions and our study of the impact of previous natural disasters.Overall, we believe the earthquake, tsunami, and related disasters in Japan can create a negative short term economic shock to both supply and demand globally. The tragic loss of human life on such a large scale will no doubt have an immeasurable effect for generations to come. The massive destruction of physical capital will also inevitably have an impact on the global supply chains in many of Japan's core sectors, including semiconductors and automobiles. Meanwhile, global demand for certain commodities, services, and manufactured goods will also decline in the near term given depressed Japanese demand.
Impact on emerging markets
While it is difficult to quantify these anticipated supply and demand shocks, we believe there are several points to note regarding the likely impact on the emerging markets. First, we believe the disaster in Japan will have a disproportionate impact on emerging market economies. Clearly, the countries which are closest to Japan geographically as well as those which are tied more tightly to the Japanese economy are likely to be affected more directly than the countries in Latin America and EEMEA (Eastern Europe, the Middle East and Africa) which are further away and less tightly connected to Japan's economy. Japan is also a major export destination for the rest of Asia, as well as a supplier of goods and services such as advanced technology, tourism, and, importantly, core machinery parts for companies and consumers from China, Korea, Taiwan and other countries in Asia. Thus, we expect a negative impact across several sectors in Asia to result from the disasters in Japan. In addition, emerging market countries near Japan are likely to have an ongoing concern about radioactive materials in the air, which may also reduce socio-economic activity in this region.At the same time, Asian companies that compete with Japanese companies may benefit from the factory shutdowns and declines in production expected to occur in Japan, as well as a temporary strengthening of the Japanese yen against major global currencies. As we have observed from the earthquake in Kobe, Japan in 1995, the Japanese yen tends to strengthen against most currencies after a large natural disaster, as the risk aversion in foreign exchange markets combined with the expectation of repatriation of money to help rebuild infrastructure in the country boosts the currency. On the other hand, if this trend begins, it may soon reverse itself if the Japanese government executes a monetary and fiscal stimulus to help rebuild the economy gradually over the next few weeks or months, as we believe it will. We also anticipate that other Asian economies will benefit from the massive rebuilding efforts that will be necessary for Japan to recover fully.
Impact on commodities
The implications for the commodities markets are mixed. Many commodities prices will likely continue to remain soft in the near term given the possible negative impact of the recent events in Japan on global economic growth. However, a shift away from nuclear power to natural gas or oil in Japan — which we believe to be a likely result — may, in part, support the prices of these energy sources over the longer term. In addition, any rebuilding efforts may increase demand for selected raw materials. Impact on Latin AmericaOverall, we believe Latin America is slightly more immune to the situation in Japan. The Latin American economies are geographically separate and less economically dependent on Japan than those countries in Asia. For example, Korea is both a competitor to Japan (in semiconductors, electronics, automobiles and nuclear power) as well as a heavy dependent on Japanese manufacturing (for core parts and intermediary goods). Similarly, if we observe trade statistics, we can see the heavier dependence of the rest of Asia as consumers of Japanese exports. China, for example, depends on Japan for 10% of its global trade, while Brazil utilizes Japan for less than 4% of its global trading. (Source: Ministry of the People's Republic of China, Ministry of Development, Industry Commerce) Thus, we believe equity markets in more distant countries such as Brazil will feel less of an impact in the near term. On the other hand, as the situation stabilizes, we believe that harder hit Asian economies and equity markets may rebound more swiftly.