As the destructive Australian bushfires raged in January, the International Monetary Fund (IMF) warned the world economy is increasingly vulnerable to the impact of climate change. They claim it is “the driver of the increased frequency and intensity of weather-related disasters,” implying such disasters are a significant economic or financial market risk.[i] Now, climate change is a divisive issue, and we won’t opine on its politics. Nor are we here to debate scientific research. But whether you believe climate change is contributing to a rise in devastating natural catastrophes or not, in our view, long-term investors shouldn’t let this issue impact their portfolio decisions. Whilst natural disasters are destructive and tragic on a humanitarian level, our analysis shows they don’t automatically bring material economic or market disaster.
A natural disaster would have to knock a few trillion dollars off global Gross Domestic Product (GDP)—a government-produced estimate of economic output—for it to cause a global bear market. World GDP was $86 trillion in 2019 (~$119 trillion), according to the IMF. In its most recent forecast (issued before the coronavirus spread globally), the IMF projected inflation-adjusted growth of 3.3% this year.[ii] Hence, anything smaller than a few trillion euros wouldn’t be sufficient to cause annual GDP to shrink. No natural disaster has ever come close to this. The costliest on record is America’s Hurricane Katrina in 2005, which caused an estimated ~$208 billion (~€135 billion) in damage to the US Gulf Coast—most notably, to New Orleans. The second costliest is Japan’s Great Tohoku Earthquake and Tsunami in 2011, at roughly ~$166 billion (~€108 billion).[iii] Neither caused a global bear market, although the Tohoku disaster (which included the nuclear meltdown at Fukushima) did disrupt local economic activity enough to spur a short Japanese recession. Japanese equities initially plunged in its aftermath, falling -14.1% in four trading days as investors digested the destruction and cost of rebuilding (which would later add to GDP, showing how disasters shift spending).[iv] But it was short-lived—global forces soon regained primacy. In our view, the eurozone debt crisis was much more important to global equity market returns than Japan’s troubles that year.
Hurricane Katrina didn’t even cause a US recession, much less a global one. The total damage amounted to barely 1.2% of 2005 US GDP, and GDP grew 3.5% that year adjusted for inflation.[v] 2017’s Hurricane Harvey—America’s costliest natural disaster since Katrina—didn’t cause a recession either. Its estimated cost, ~$173 billion (~€113 billion), amounted to less than 1.0% of 2017 US GDP; adjusted for inflation, GDP grew 2.4% in 2017.[vi] This growth occurred despite many local businesses remaining closed for some time as their owners dealt with flood damage and lost inventory. But such closures typically pale in comparison to overall national economic activity.
Natural disasters’ economic impact is usually temporary. You can see this in both employment figures and GDP. For example, after Hurricane Katrina struck in August 2005, September nonfarm payrolls fell by 35,000, reflecting the many people who couldn’t work in the impacted areas as a result of the storm.[vii] However, payrolls rebounded the next month. Nonfarm employment rose by 56,000 in October, and in November, it picked up by 215,000—boosted by construction jobs which reflected rebuilding and clean-up efforts in Katrina’s aftermath.[viii] Hence, the most damaging hurricane in US history didn’t derail US job growth—or the economic expansion. Similarly, when the Hokkaido earthquake and subsequent typhoons hit Japan in September 2018, the disruption was temporary. Japanese GDP fell -3.3% annualised in Q3 as the catastrophes temporarily impacted exports and consumer spending.[ix] However, as consumer spending recovered, Q4 2018 GDP rebounded, growing 2.4% annualised.[x]
Most importantly, natural disasters have largely lost their power to shock investors. Markets have dealt with them since the dawn of history and understand how they interact with the economy. Numerous natural disasters have occurred during bull markets. One example is 2003’s European heat wave, which unleashed massive fires and claimed at least 30,000 lives.[xi] The MSCI Europe Index rose 13.3% that year.[xii] Ten years later, Central Europe endured the Continent’s worst floods in over 500 years, causing around ~$22 billion (~€14 billion) in damages across Germany, Austria, the Czech Republic and Switzerland.[xiii] Yet European markets returned 33.6% that year.[xiv] Similarly, the 2017 Iberian wildfires caused over €1 billion in damage and killed more than 100 people.[xv] Yet European equities continued rising in October when the fires raged, returning 17.3% for the year.[xvi]
If even the worst earthquakes, typhoons, floods and fires haven’t caused bear markets thus far, in our opinion, it seems like a stretch to presume natural disasters are a massive risk for the global economy or equity markets. Moreover, proclamations like the IMF’s seem to us more like political machinations than genuine economic forecasts. In our view, investors benefit from tuning out such noise and not letting it affect their portfolio decision making.
[i] “IMF: Climate Crisis Threatens Global Economic Recovery,” Phillip Inman, The Guardian, 20 January 2020. https://www.theguardian.com/business/2020/jan/20/imf-us-sanctions-threat-will-limit-global-economic-recovery
[ii] Source: International Monetary Fund (IMF), as of 21/02/2020. GDP forecast, 2019–2020. 2020 estimate based on the IMF’s January 2020 World Economic Outlook global GDP growth. https://www.imf.org/en/Publications/WEO/Issues/2020/01/20/weo-update-january2020
[iii] “Impacts of Severe Natural Catastrophes on Financial Markets,” Cambridge Centre for Risk Studies, March 2018. https://www.jbs.cam.ac.uk/fileadmin/user_upload/research/centres/risk/downloads/crs-impacts-of-severe-natural-catastrophes-on-financial-markets.pdf
[iv] Source: FactSet, as of 11/03/2020. MSCI Japan Index return with net dividends in CAD, 11/03/11–15/3/11.
[v] Source: US Bureau of Economic Analysis, as of 17/03/2020. Estimated Hurricane Katrina damage as a percentage of 2005 US GDP; 2005 GDP growth.
[vi] Source: US Bureau of Economic Analysis, as of 17/03/2020. Estimated Hurricane Harvey damage as a percentage of 2017 US GDP; 2017 GDP growth.
[vii] Source: Bureau of Labor Statistics, as of 21/02/2020. https://www.bls.gov/news.release/history/empsit_10072005.txt
[viii] Source: Bureau of Labor Statistics, as of 21/02/2020. https://www.bls.gov/news.release/history/empsit_11042005.txt, https://www.bls.gov/news.release/history/empsit_12022005.txt
[ix] Source: FactSet, as of 17/03/2020.
[x] Source: FactSet, as of 17/03/2020.
[xi] “European Heat Wave of 2003,” Encyclopedia Britannica, January 2020. https://www.britannica.com/event/European-heat-wave-of-2003
[xii] Source: FactSet, as of 11/03/2020. MSCI Europe Index return with net dividends in CAD, 12/03/2002–31/12/2003.
[xiii] “Geographical Breakdown of Natural Disasters,” ePACT, 13 November 2013. https://www.epactnetwork.com/corp/blog/geographical-breakdown-natural-disasters-europe/
[xiv] Source: FactSet, as of 11/03/2020. MSCI Europe Index return with net dividends in CAD, 31/12/2012–31/12/2013.
[xv] “Forest Fires in Europe, Middle East and North Africa 2017,” Staff, European Commission and Joint Research Centre, 14/09/2018. https://effis.jrc.ec.europa.eu/media/cms_page_media/40/Annual_Report_2017_final_pdf_uCckqee.pdf
[xvi] Source: FactSet, as of 11/03/2020. MSCI Europe Index return with net dividends in CAD, 31/12/2016–31/12/2017.
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Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments Canada and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments Canada will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein
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