Hurricane Sandy: Looking ahead toward recovery

Hurricane Sandy brought an enormous amount of devastation to the U.S. Eastern seaboard, and the region now faces a difficult recovery. Millions of people are affected, and our thoughts are with them.

Ultimately, the storm resulted in untold levels of property damage, loss of transportation services, and two days of frozen securities markets. Markets have not been impeded to this degree by weather since the 1880s, and investors can’t be faulted for questioning the broader ramifications of these circumstances. Will they complicate the investment landscape in a lasting way? In the notes that follow, portfolio managers from four investment teams weigh in.

By Christopher S. Beck

The developments cited below are based on data published by sources that include Dow Jones, Reuters, Bloomberg, and Insurance Journal.

As is often the case following a natural disaster, investors are trying to sort out companies that they believe will benefit from a significant reconstruction effort as well as those that will potentially face negative pressures. Aside from company-level concerns, however, one important dimension to this scenario involves the two-day shutdown of stock markets; markets were closed on October 29 and October 30, something that is exceedingly rare. This will very likely lead to discussions on how to prevent markets from going off line during future disasters (while taking into account how relatively rare they are). These discussions will likely focus on the fact that Hurricane Sandy came dangerously close to causing serious harm to the “physical plants” that make up the exchanges — as well as threatening the safety and mobility of many employees who work at the exchanges.

Keeping the above in mind, it’s worth remembering that stock transactions today are processed largely electronically. This does not diminish the role the personnel play; but barring a change in location of the exchanges (which is extremely unlikely), we do not anticipate that the wake of Hurricane Sandy will lead to serious changes in day-to-day market operations.

By Paul A. Matlack

The developments cited below are based on data published by sources that include Dow Jones, Reuters, Bloomberg, and Insurance Journal.

While it’s too soon to accurately assess the full consequences of Hurricane Sandy, the following details are known:

  • The storm affected a region encompassing 60mm people and 25% of U.S. gross domestic product (GDP)
  • Estimates of total damage range from $15 billion to $50 billion, with insured damages substantially less (as is common with all hurricanes). Property/casualty insurers are — in general — well capitalized and should not have difficulty raising additional capital if necessary.
  • While the wealth impact will be significant, ramifications to GDP will be caused by lost output, which is compounded somewhat by the arrival of the storm on the first day of the work week.
  • Rising gas prices, caused by refinery shutdowns, should be short lived as production ramps back up in the coming weeks.
  • On a highly speculative basis, we believe the GDP impact could be on the order of 20 basis points* during the fourth quarter, although this is typically fully recovered during the course of the reconstruction process. This will begin to offset the GDP decline by the end of the quarter.
  • Most of the geographic areas affected are heavily Democratic, so even if voter turnout is hampered, it is unlikely to affect the pre-storm electoral map.
  • A slowdown in growth with a run-rate GDP of less than 2% increases the vulnerability of the economy to an external shock; however, the offsetting positive effect of rebuilding should kick in fairly quickly.
  • This may provide a short term boost for Treasuries, but is unlikely to alter our low growth, low inflation, low interest rate outlook, and should be relatively benign for credit sectors such as High Grade and High Yield bonds.
  • There could potentially be an adverse effect on the U.S. Federal budget because flood insurance is typically covered by a federal program.

*One basis point equals 1/100 of a percentage point.

By D. Tysen Nutt Jr.

The developments cited below are based on data published by sources that include Dow Jones, Reuters, Bloomberg, and Insurance Journal.

It’s been a difficult few days for many residents in our region. Hurricane Sandy has caused considerable disruption and destruction of property. Our thoughts and prayers are with those who are suffering in the storm’s aftermath.

As long-term investors with a three- to five-year horizon, we have not made any changes to positioning within the portfolios we manage. Our portfolios continue to emphasize stocks issued by higher-quality companies that have what we believe to be attractive valuations. In the near term, we think the storm may have a measurable effect on several industries where the portfolio has exposure, including the following:

  • Telecommunications firms will see higher expenses from repairing damaged infrastructure. The major carriers have been reducing capital expenditures in recent years following major investments in broadband connectivity around the country. We don’t envision hurricane-related repair expenses having a significant effect on these companies because of their strong cash flows.
  • Property/casualty insurers will see an increase in insured losses. Early estimates of commercially insurable losses are between $5 billion and $10 billion — a range well below estimates for total losses. (Data: Dow Jones.) This is because much of the damage was caused by flooding, which is often covered by alternative policies (such as national flood insurance) rather than traditional property coverage. We think insurable losses should be manageable for the industry and, in particular, for the holdings within the portfolios we oversee. Furthermore, the pricing environment for insurers, which has been improving, should continue to solidify.
  • Home-improvement retailers are positioned to benefit as repair and rebuilding work gets underway. Given the challenges facing consumers in general, this could potentially pull some seasonal spending away from traditional holiday retailers in the areas affected by the storm.

By Babak "Bob" Zenouzi

The developments cited below are based on data published by sources that include Dow Jones, Reuters, Bloomberg, and Insurance Journal.

Clearly the devastation has caused an interruption of commerce, mostly in New York and along the eastern corridor. In terms of the real estate sectors that we cover, we believe hotels will feel the brunt of the aftermath. Already, flight cancellations have caused conferences (as well as transient business travel) to be permanently lost. One possible upside, however, is that the rebuilding efforts within New York and New Jersey will likely act as an infrastructure spending bill. Roads, bridges, dwellings, and utilities systems will need to be upgraded, which should help home builders, engineering-and- construction services providers, as well as cement companies.

We think with the U.S. Federal Reserve, already on high alert for any additional softening of the U.S. economy, will only be emboldened by this tragedy, thereby increasing liquidity and offering additional monetary measures (including outright printing of new money) if needed.

The views expressed represent the Manager’s assessment of the market environment as of November 2012, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager’s views.

Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting the fund literature page or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.

IMPORTANT RISK CONSIDERATIONS

Investing involves risk, including the possible loss of principal.




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