Special Report
March 15, 2011
Report Prepared by:
Ryan Lewenza, CFA, CMT
Senior U.S. Equity Strategist
Martha Hill, CFA
Senior Canadian Equity Strategist
This document is for
distribution to Canadian clients
only.
Please refer to Appendix A
for important disclosures.
Portfolio Advice & Investment Research
Aftershocks – A Look at the Japanese Disaster
Summary
Following the devastating 9.0 magnitude earthquake and tsunami on Friday
March 11, 2011, Japan is faced with its worst disaster since World War II. It is
a catastrophe which could be further compounded by the potential for a nuclear
meltdown at the Fukushima Daiichi power plant. With preliminary estimates of
reconstruction in the US$150-200 billion range (3-4% of economic output), the
economic impact on Japan will be substantial, however this pales in
comparison to the human costs of this tragedy. In this report we summarize the
fallout from this crisis, highlighting the potential implications on specific
sectors and industries.
Key conclusions:
• It is too early to assess the full extent of the economic and human toll of
the tragedy.
• The disaster in Japan has shaken already fragile equity markets, which are
likely to face further volatility over the near term.
• Japan’s economic growth is expected to be 0.5% lower in 2011, with TD
Economics now forecasting 2011 GDP of 1.4%. Global economic growth
is not expected to suffer significantly. Japanese growth is expected to
rebound in 2012 due to reconstruction.
• Nuclear-energy related stocks have suffered the biggest declines in the
days following the earthquake and tsunami. Longer-term sectors poised to
benefit from Japan’s rebuilding efforts include forest products (lumber),
steel (and coking coal), as well as heavy equipment. Non-nuclear energy
stocks (such as wind, solar, coal, natural gas, oil) could benefit from a
slowdown in nuclear power development.
Social Unrest and Natural Disasters
Strong Q4/10 corporate profits, improving economic data and quantitative
easing by the U.S. Federal Reserve (the Fed) have all combined to reduce
volatility and ease investor concerns over the equity markets. However,
following a period of relative calm in the equity markets, there has been a
material uptick in volatility in recent weeks (see Exhibit 1). In recent
publications we have been highlighting the extreme bullishness and investor
complacency in the equity markets, and our belief that there could be a
temporary pause or pullback, to work off the overbought and overconfident
condition.
As expected, stock markets began to pull back in late February. The S&P 500
Index (S&P 500) is down 4% from its 1,344 high on February 18. The
S&P/TSX Composite Index (S&P/TSX) has declined 5% over the same period.
The primary causes of the recent weakness in the equity markets and the rise in
volatility are: 1) the social unrest in the Middle East and North Africa; 2) a
spike in oil prices in reaction to the heightened geopolitical risk; 3) renewed
European debt concerns following the credit downgrades to Greece and Spain,
and 4) the catastrophe in Japan.
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In the wake of the disaster equity markets have been weak while bonds have strengthened as investors look to reduce risk
in portfolios. The Japanese stock market has suffered the worst of the declines with the Nikkei 225 Stock Average down
17% over the past two days. While it is still too early to determine how the situation in Japan will unfold, we expect the
equity markets to face increased volatility in the weeks ahead. Additionally, the equity markets are likely to come under
further pressure if the unspeakable were to occur, that is if one of Japan’s nuclear plants were to experience a nuclear
meltdown. From a technical perspective, the support levels for the S&P 500 are 1,275 and 1,225 (S&P/TSX Composite
support levels are 13,250 and 13,100), which could help to limit downside, should the markets come under further
pressure.

Exhibit 1: Volatility and Oil Prices are on the Rise

Volatility Index (VIX) WTI Oil ($/barrel)
37
$110
Following months of steadily declining volatility in the equity
markets, volatility has began to increase following the flare up $105 Oil prices, which have been steadily rising
in the Middle East and the crisis in Japan. for months, broke out in February as social
32 $100 unrest in the Middle East picked up.

$95
27 $90
$85
22 $80
$75
17 $70
$65
Source: Thomson. As of March 14, 2011 Source: Thomson. As of March 14, 2011
12 $60
Jul-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11

Economic Impact
The area directly impacted by the earthquake and tsunami represent roughly 8% of Japan’s GDP. While the most direct
impact will be felt in this region, the impact of the disaster will be felt throughout Japan. The disruption to the power
supply due to the shutdown of 20% of Japan’s nuclear power plants is likely to dampen manufacturing activity in other
parts of the country for some time. In addition, the damage to the nation’s infrastructure (roads, railways) is likely to
impact supply chains or the transportation of goods and services. TD Economics believes the impact on Japan’s economy
this year will be significant but manageable, and has cut their GDP forecast for Japan from 1.9% to 1.4% for 2011.
However, TD Economics has increased its growth forecast for 2012 from 1.6% to 2% due to the reconstruction that will
take place. Japan has a history of coping with earthquakes, and is likely better prepared to deal with disasters than most
countries. Using history as a guide, following the Kobe earthquake in January 1995, Japan’s GDP grew by 1.8% that year
and by 2.7% in 1996. The destruction with the most recent earthquake has been compounded by the tsunami.

Although Japan is the world’s third largest economy (8.7% of global GDP), lowered expectations for Japanese economic
growth is not expected to have a meaningful impact on global growth. For the U.S. and Canada, the impact on economic
growth is also expected to be relatively small as Japan represents 5% and 2.3% of U.S. and Canadian exports,
respectively.

Sector Implications
Uranium & Nuclear Power
Japan sources approximately 30% of its annual electricity requirements from nuclear power and as of last week there were
54 commercial nuclear reactors in operation in the country. Eleven reactors were automatically shut down on Friday as a
result of the earthquake. The Fukushima Daiichi power plant is in focus due to significant difficulties with the cooling
systems which has led to an increasing risk of a reactor meltdown. As a result of the escalating risks, authorities have
evacuated upwards of 200,000 people within a 30 km radius of the plant. With 20% of Japan’s nuclear reactors off-line
indefinitely (and in some cases permanently), share prices of uranium producers have plummeted due to expectations for
lower demand for uranium (Japan represented 12% of global demand in 2010). Also weighing on share prices is the
concern that the nuclear renaissance could come to an abrupt halt as the potential for a nuclear meltdown has rekindled
memories of past nuclear power plant disasters, in particular Chernobyl (1986). While it is unlikely that all nuclear power

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development will come to a complete halt following the events in Japan, there is the potential for some reactor
construction delays, particularly in earth-quake prone areas. Russia, China and Korea have pledged to continue their
nuclear power development programs, while Germany and Switzerland are calling for a moratorium. Due to the
heightened level of uncertainty and rapidly changing circumstances, we recommend investors avoid nuclear-power related
stocks such as uranium producers until there is more certainty on Japanese nuclear power plant containment.

Insurance
Following a natural disaster, one sector that immediately comes to mind is the insurance sector. Overall, we believe the
impact to North American insurance companies will be manageable, and in most cases minimal. Among the reinsurance
companies, Berkshire Hathaway’s (BRK.A-N) wholly owned subsidiary General Re and Swiss-based Swiss Re
(SWCEY-Q) could realize losses from this event. On the life insurance side, Prudential Financial (PRU-N), Metlife
Inc. (MET-N) and Aflac (AFL-N) stand out in the U.S. According to Credit Suisse, losses related to the Japanese
earthquake are likely to be less than 10% of Q1/11 EPS for PRU, and less than 5% of Q1/11 EPS for MET and AFL.
Since the area of Japan that was affected the most by the quake is a more rural region, Credit Suisse expects the impact to
be minimal to these firms. Among the Canadian insurers, Manulife Financial (MFC-T) has the largest exposure due to
its reinsurance business and life insurance business in Japan. MFC has issued a statement that it does not expect the
property and casualty claims related to the earthquake and tsunami on March 11 to exceed $150 million (approximately
$0.08/share). Manulife remains leveraged to equity markets and interest rates and weakness in the equity markets will
likely impact earnings and weigh on sentiment.

Gold
Gold has traditionally served as a hedge during periods of uncertainty. Not surprisingly, gold has rallied to new highs
during the past few tumultuous weeks (see Exhibit 2). We have, and continue to recommend, investors include exposure
to gold or gold-related stocks to provide a hedge against the myriad of risks facing global markets. Adding to gold’s allure
is the continued weakness in the U.S. dollar on the back of the Fed’s highly accommodative monetary policies. Given the
social unrest in the Middle East and North Africa, renewed European debt concerns, and a continued weak outlook for the
U.S. dollar, gold should continue to shine. Our preferred gold stock names are Goldcorp (G-T) and Newmont Mining
Corp (NEM-N).

Exhibit 2: Maintain Exposure to Gold Given Strong Fundamentals and Weak U.S. Dollar
Gold ($/ounce) U.S. Dollar Index
$1,500 90

$1,400 88 U.S. dollar remains in a clear downtrend,

which is supportive of gold prices.
$1,300 86

$1,200 84

$1,100 82

$1,000 80

$900 78
Gold remains in a clear uptrend. The positive
$800 76
technical trend for gold continues to support
our bullish fundamental position. 74
$700 Source: Thomson. As of March 14, 2011
Source: Thomson. As of March 14, 2011
$600 72
Mar-10 Apr-10 Jun-10 Jul-10 Sep-10 Oct-10 Dec-10 Jan-11 Mar-11
Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10

Forest Products
Following the Kobe earthquake in 1995, many of the Japanese building codes were changed to encourage the use of
wood/lumber to build earthquake resistant structures. With a massive, multi-year rebuilding effort ahead, Japan is likely
to look to its traditional lumber suppliers, including western Canada, to fill their lumber requirements. The Canadian
lumber producers most exposed to Japan include Interfor Ltd. (IFP.a-T), Canfor Corp. (CFP-T) and West Fraser Co.
(WFT-T). TimberWest Corp. (TWF.un-T) also ships a significant volume of raw logs to Japan.

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Alternative Energy
As concerns about the potential for a nuclear disaster build, the anti-nuclear movement’s case for alternative forms of
energy such as wind and solar power is strengthened. The potential for a slowdown in nuclear power development has
buoyed share prices for solar and wind-related stocks. In particular First Solar (FSLR-Q) rose over 5% yesterday, while
the pure-play wind turbine manufacturer, Vestas Wind Systems (VWDRY-Q) rallied nearly 7%. For wind power, we
like Vestas Wind Systems but we highlight its lack of trading liquidity with average daily trading volume of 84,000
shares. In solar we like First Solar, due to its dominant market position and stronger balance sheet relative to peers.

Energy
As the world’s third largest oil importing nation, slower than expected economic growth in Japan could dampen oil prices
in the near term. Japan will need to replace the electricity supplied by the nuclear reactors that will not return to service
(and during the time it will take to bring other reactors back on line); other sources of energy such as oil, natural gas, and
coal could see a boost in demand. On Monday U.S. coal producers such as Cliff Natural Resources (CLF-N), and
Peabody Energy (BTU-N) rallied over 1% and 3%, respectively. Similarly we saw the refiners rally around concerns of
increased demand. Natural gas could stand to benefit given its lower risk (relative to nuclear) and lower carbon emissions.
Here we like Chesapeake Energy (CHK-N).

Steel
Japan is a net steel exporter. With the damage to Japan’s infrastructure (impacts distribution capabilities) and expectations
for lower industrial production due to power shortages, the global supply of steel is likely to be reduced for a period of
time. An offset to this is the ramp-up in Chinese steel production as well as global capacity prior to the disaster was
approximately 76%, which suggests lost Japanese production could be made up by other sources. Japan will require steel
for its reconstruction efforts. While the total requirements are difficult to forecast, it is expected to be enough to push
steel prices higher. Stocks with leverage to steel prices include Russel Metals (RUS-T) and U.S. Steel (X-N).

Heavy Equipment
Construction equipment and heavy machinery will be required for both the clean up and the massive reconstruction.
Global heavy equipment manufactured Caterpillar (CAT-N), stands out as a potentially beneficiary.

Conclusion
It is still far too early to determine the full extent of the economic and human toll the earthquake and tsunami will have on
Japan. The country will rebuild once the search and rescue and clean-up efforts have been completed, but it will be at a
significant cost. We expect equity markets to face aftershocks over the near term as events continue to unfold. We remind
investors to focus on their long-term strategic investment goals and ensure their portfolio’s asset mix (combination of
stocks, bonds, and cash) is a reflection of their objectives and risk tolerance.

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Appendix A – Important Disclosures

Full disclosures for all companies covered by TD Newcrest can be viewed at

https://www.tdresearch.com/equities/coverage.disclosure.action

Analyst Certification
The TD Waterhouse Portfolio Advice & Investment Research analyst(s) responsible for this report hereby certify that (i) the
recommendations and technical research opinions expressed in the research report accurately reflect the personal views of the
analyst(s) about any and all of the securities or issuers discussed herein and (ii) no part of the research analyst's compensation was, is,
or will be, directly or indirectly, related to the provision of specific recommendations or views contained in the research report.

Conflicts of Interest
The TD Waterhouse Portfolio Advice & Investment Research analyst(s) responsible for this report may own securities of the issuer(s)
discussed in this report. As with most other TD Waterhouse employees, the analyst(s) who prepared this report are compensated
based upon (among other factors) the overall profitability of TD Waterhouse and its affiliates, which includes the overall profitability
of investment banking services, however TD Waterhouse does not compensate analysts based on specific investment banking
transactions.

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TD Newcrest/TD Securities Disclosure

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