Swine Flu – Which parts of the market are prone to infection?
Just as risk appetite was returning to global financial markets, the last thing we need is a potential global flu pandemic. At present there are still many more questions than answers (how infectious, how deadly?) and it seems unlikely that these can be answered quickly, further denting the already tentative return of investor confidence.
Whilst it’s imperative not to panic, we feel it’s also important for investors to quickly evaluate how the potential pandemic may affect financial markets and prepare for the different eventualities. One way to consider the possible effects is to draw comparisons from the way the 2003 outbreak of Severe Acute Respiratory Syndrome (SARS) affected markets. Although SARS never materialised as a global pandemic, it lasted six months and killed 775 of the 8,000 people infected across 25 countries.
The four main economies affected by the SARS outbreak were China, Hong Kong, Taiwan and Singapore. At a macroeconomic level, the GDP shock was relatively short lived; all four saw dips in quarterly figures, but growth rates soon rebounded in the following quarters as it became apparent that the outbreak was under control. However, as you might expect, performances across economic sectors and individual companies varied widely. The most severely affected areas were Hotels, Air Transport, Restaurants, Retail and Land Transport which experienced a direct and immediate curtailment in spending and economic activity. There were also some sectors which benefited from the outbreak, all health related, with Pharmaceuticals, Diagnostic Laboratories, Vaccine Development and Hospital/Essential Services sectors all benefiting.
So what individual UK companies can we expect to be affected from the recent swine flu outbreak? Early indications are that trends are following a similar pattern to that of SARS, although it must be remembered that SARS was a relatively well contained outbreak and never developed into a pandemic, with international trade and foreign direct investment largely unaffected. This time, the authorities seem convinced that the risks are greater, particularly as we move closer to our flu season later in the year and if, as predicted, the swine flu virus mutates into a more virulent strain. When news of the first swine flu cases broke, Airline and Travel/Tourism related stocks all suffered. British Airways, InterContinental Hotels, TUI, Thomas Cook and cruise company Carnival were amongst the biggest losers in the FTSE. As one might expect, based on past experience, the pharmaceutical firms GlaxoSmithKline, AstraZeneca and Shire all rose, buoyed by the drug makers assurances that they could supply millions of doses of medicine and were ready to work on a vaccine against swine flu.
The severity of the outbreak will determine how wide the shock waves run. So far the areas affected have been confined to those directly influenced, but this will change rapidly if a pandemic is confirmed and fear spreads that it will prolong or hamper the recovery in the beleaguered world economy. Moody’s, the credit ratings agency, estimates that a global pandemic could knock 0.8% off global GDP in the coming year. A significant effect on an already struggling world economy which could forestall any economic recovery for the time being.
It is possible to see how a broader range of individual companies could be affected, if the pandemic develops with Mexico having already enforced the closure of restaurants, cinemas and the like. UK Pub companies, Leisure stocks and Retailers could all suffer if we get to the stage of limiting public gathering. Thankfully, at present, this seems some way off; so far only one death from the virus has been confirmed outside of Mexico, those infected in the rest of the world have suffered only mild symptoms and transmission rates appear low. However, as always, it’s worth being prepared.
