Friday, March 18, 2011

Rebuilding Japan

The news from Japan seems a little more encouraging this morning, but it's way too early to say that the worst of the nuclear crisis is over.

In addition, the enormous task of helping the victims of the tsunami is only beginning.

Still, as an investor, it is not too early to think about what will happen after the crisis abates in Japan.

Japan is the third largest economy in the world, populated by a very smart workforce and world class companies. Economic growth for the last 20 years has been anemic as the country still recovers from the excesses of the last 1980's but it is still a very rich country.

Japan has experienced natural disasters before, like the Kobe earthquake in 1995. They have shown themselves to be incredibly resilient, and I have no doubt that they will emerge stronger from the horrible events of the past few weeks.

Barclays estimates that the cost of Japan's recent disaster will be in the neighborhood of $60 billion to $120 billion. However, if the Japanese authorities are able to contain nuclear damage, it could very well be that the cost comes in at the lower end of these estimates.

This morning's Financial Times notes that the eventual cost of the Kobe earthquake reconstruction was around $120 billion, but it appears that this time around there are much fewer damaged buildings, which again is cause for hope.

Japan can afford this bill, as staggering as the numbers are. Even the upper end of the Barclays estimates is around 2% of Japanese GDP. In addition, the Japanese government was already on the verge of yet another stimulus plan, so in a sense they were already planning to spend this money.

I'll be writing more about this topic in the days ahead, but at this point it seems likely that US industrial companies are likely to be bigger winners.

Despite the coordinated intervention of the G-7 earlier this morning, the yen still stands at 15 year highs relative to the dollar. US companies will be offer incredibly competitive pricing to help rebuild Japanese infrastructure.

In addition, the world has suddenly become anti-nuclear. How long this sentiment persists is obviously unknowable at this point - particularly since nuclear offers clean reliable power to many parts of the world - but new power plants will need to be built. Companies like General Electric should benefit (along with other industrial companies like Siemens from Germany).

I've been slowly adding to positions in industrial companies in client portfolios this week, and will probably continue to add next week after I've had the chance to do more reading this weekend.

In the meantime, let's hope and pray that they get those plants under control.