The Japanese devastation is almost incomprehensible. First there was the earthquake, followed by the tsunami, followed by radiation. It seems the disaster has no end. The people are suffering beyond imagination. It will be a long time for the country to heal. In the north, it will take decades.
Investors are trying to understand what the economic aftershocks will be. Which industries will be hurt and which ones will benefit? Because the crises change from day to day, it's extremely difficult to ascertain. But there are a few themes that seem to be emerging. Some of these will be short lived, such as the closing of the Japanese auto manufacturers. While they will lose days of production, the long-term effect will be minor, unless supplies are interrupted, causing further delays.
The first industry that will be most needed is construction. Rebuilding roads, homes, commercial sites, airports will be paramount to any sense of normalcy. That means heavy equipment makers like Caterpillar (CAT) should see increased demand. Building materials will also see large orders, especially for lumber, cement, tar, gravel. Furniture makers will see a spike in demand as will appliance manufacturers.
The ripple effect of construction is powerful. With billions of dollars in damage, rebuilding is not optional. It has to be done. The companies supplying the goods and services for homes, infrastructure, energy, etc. will be some of the beneficiaries from the disaster and the most immediate.
Alternative energy will get plenty of attention. Solar power is an attractive solution to nuclear, though much more expensive. But economics won't be the only driver on energy decisions going forward. It's not about the lowest cost. The focus will be on safety. Germany shut down several nuclear plants for inspections. The fear of nuclear power is now global. Alternative energy sources will be explored and bought. Solar will be one that will benefit. But the growth will be slow. Currently, nuclear power generates 13.5% of the world's electricity, according to the International Energy Agency. Solar power is .06%. The cost of electricity from solar compared to nuclear is estimated at twice the price. Another alternative: gas. It's cheaper at about 30% the cost of solar. But there are concerns related to how it's mined, particularly shale drilling.
An industry sure to be hurt by the disasters is insurance and re-insurance. Any company with exposure to Japan will have large payouts as claims will most likely be the highest in the country's history. If investors own insurance stocks, they need to determine whether the companies cover Japan and how much of their business is done there.
Tourism is another. Visiting Japan right now doesn't seem wise. Airlines won't be as full to Japan. Hotels and restaurants won't either. Any company in the hospitality or travel business will have a difficult year, if not 2 or 3.
What about venturing into Japanese stocks? It may be a good time because the 10% drop in one day prices many stocks at bargain levels. Certainly the largest firms will survive, and many will thrive as the country rebuilds. There could be more substantial drops ahead if more disasters hit. But buying a large-cap Japanese only fund should be attractive to more adventurous investors. It may take a while for the reward, and scaling into a position over the next month would make good sense, but as the country heals, these funds should do very well.
- Ted Allrich
March 15, 2011