TIAA-CREF’s chief investment strategist discusses Japan and the global outlook

Brett Hammond is Chief Investment Strategist for TIAA-CREF Asset Management.

March 17, 2011

The reaction to Japan’s earthquake and the resulting nuclear crisis sent shudders through global financial markets this week. However, it makes sense to separate short-term and long-term effects. It’s important to go beyond the headlines to help put things in perspective.

The situation in Japan is clearly catastrophic from a humanitarian perspective, and our hearts go out to the Japanese people. When you have an event of this magnitude happen to a leading economy and a huge exporter of goods, there’s going to be a reaction, but as investors, we also want to look longer term.

Developed countries can rebuild

This week we’re seeing investors react to short-term uncertainty. Yet what we’ve learned from previous disasters in developed nations like Japan is that such countries have the resources to get things moving again, and fairly quickly.

The differentiator seems to be whether the disaster occurred in a developed country.

Research suggests that the effect of disasters on emerging or developing countries tends to be more severe because they lack the economic resources to rebuild. Sri Lanka, hit hard by the Indian Ocean tsunami in 2004, and Haiti, crippled by an earthquake last year, have struggled to recover. In contrast, the impact on Japan’s overall industrial production from an earthquake in Kobe in 1995 was modest, with no significant drag on Gross Domestic Product that year.

Disruptions we’re seeing in Japan now will be followed by additional public and private stimulus with the potential to restore economic output to previous trends within a couple of years.

The fundamentals remain in place

We continue to see solid growth in corporate earnings globally. Though earnings growth will continue in relative terms at a more modest rate because we’re coming off 35% gains in 2010, we’re seeing global profits fueled by increased availability of loans, consumer spending, and gains for suppliers of capital goods.

The limiting factor is unlikely to be Japan, which remains the world’s third largest economy, with its industrial capacity intact.

The views expressed in this Economic & Market Outlook are those of Brett Hammond of TIAA-CREF Asset Management. These views may change in response to changing economic and market conditions. Past performance is not indicative of future results. The material is for informational purposes only and should not be regarded as recommendation or an offer to buy or sell any product or service to which this information may relate.

TIAA-CREF Asset Management is a division of Teachers Advisors, Inc., a registered investment advisor and wholly owned subsidiary of Teachers Insurance and Annuity Association (TIAA).

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