Recent waves of earthquakes in Haiti, Chile, and Japan sent home the idea that despite advances in building and infrastructure, we're all subject to Mother Nature's whims. In today's increasingly interconnected economy, the economic fallout from a natural disaster is rarely relegated to the geographic area that it hits. In fact, even natural disasters that take place thousands of miles away can shake up your portfolio here at home.
In Pictures: 10 Ways To Prepare For Nature's Worst
Besides loss of life, infrastructure destruction is by far the most obvious type of damage that comes to mind when we think about natural disasters. After all, traditional television news has made images of damaged homes and businesses ubiquitous following nearly every earthquake or tornado that touches down.
But the economic consequences are rarely considered beyond what the cost will be to rebuild. That's a serious problem for the victims of natural disasters because it's the economic fallout that leaves some of the longest-lasting scars.
The Unforeseen Problem
One of the biggest problems for areas affected by natural disasters is business disruption. With road, communication infrastructure, and building damage common after sizable disasters, it's not uncommon for local businesses to be shut down for some time after the aftershocks settle. On a grand scale, that's what happened after Hurricane Katrina ravaged the Gulf coast back in 2005 – as companies reeled from catastrophic losses, millions of workers in Louisiana, Texas and Mississippi were left jobless, compounding the already staggering poverty problem in the region.
With this mass unemployment came a severe cutback in consumer spending (at the few places that were open for business) and – consequently – tax revenues needed to aid in the rebuilding efforts. Furthermore, the international impact was especially felt throughout the energy sector as oil prices escalated due to destroyed rigs and refineries. (Learn more in Using Consumer Spending As A Market Indicator.)
In places where significant portions of the country are decimated by disasters, governments are often left with little recourse; with a fraction of their former tax revenue coming in and deteriorated sovereign creditworthiness, foreign aid becomes an absolute necessity.
The Commodity Effect and Scarcity
But those factors only touch on how much of an effect a natural disaster can have on investment portfolios around the world.
Through the popularity of ADRs, ETFs and other forms of international investment diversification, the ability of U.S. investors to own shares of companies based abroad has expanded considerably in the last decade. Because of that, owning shares of any given company's stock can give an investor an interest in a refinery in Louisiana or a gold mine in Africa – and it can expose investors to the risks associated with these locales.
Less obvious – but perhaps even more significant – are the effects that a natural disaster can have on commodity prices. In the case of Hurricane Katrina, the storm's entry point at the Gulf coast is significant because of the fact that nearly half of the gasoline consumed in the U.S. passes through refineries that were affected by the storm. As a result, oil and gas supplies were affected immediately after Katrina made landfall. With increased gas pump prices, extra effects included diminished margins for industries - from transportation to consumer goods.
Similar things happened in the copper market as earthquakes in Chile choked production and inflated copper prices worldwide.
These kinds of price increases aren't just limited to market-traded commodities. When natural disaster strikes, scarcity rules, and regular staples like food, merchandise and even housing can become commoditized as a result. (Learn more in How To Invest In Commodities.)
The Bottom Line
Ultimately, it's difficult to imagine the extent of the economic repercussions a major natural disaster can bring about. And although the majority of disasters impact the devastated area's economy adversely, they can have an impact on a larger scale. Although there's little we can do to avoid Mother Nature's next catastrophe, we can better prepare for it – both physically and financially. Understanding the economic implications of a disaster is the first step toward that.
Catch up on what's making news this week. Check out Water Cooler Finance: Bailouts, Buffett-Rock And Prison Brawls.
Stock AnalysisLearn about the main reasons Tokio Marine paid $7.5 billion for HCC Holdings, including the strength of the company and a declining Japanese population.
InvestingWe share some lessons from friends and family on saving money and planning for retirement.
InvestingThere are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
Personal FinanceEven if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
EconomicsWe share some insights on how the recent terrorist attacks in Paris could impact the economy and markets going forward.
Stock AnalysisMost trading in the Indian stock market occurs through its two exchanges – the Bombay Stock Exchange and the National Stock Exchange.
SavingsHave your paperwork in order and be sure to shop around.
Chart AdvisorCopper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
Investing BasicsA diversified portfolio will protect you in a tough market. Get some solid tips here!
EntrepreneurshipThere are a lot of risks associated with running a business, but there are an equal number of ways to prepare for and manage them.
Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
The Committee on Uniform Securities Identification Procedures (CUSIP) number is a standardized identification system used ... Read Full Answer >>
There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
A greenfield investment is a particular type of investment where an international company begins a new operation in a foreign ... Read Full Answer >>