Just as global markets seem to be recovering from an economic sickness, a biological one looms. “Swine flu,” a type of flu bug transmitted from pigs and mutated into a human strain known as “H1N1,” has so far claimed the lives of over 80 people in Mexico, and sickened more than 1,400 there since April 13. Sunday, the U.S. reported its twentieth case of the flu, including 8 New York-based high school children, and it’s already spread throughout the world to Europe and Asia.
Last Time Round
An economic crisis followed by a quick bout of virulent influenza is a situation we’ve seen before. In 2002, an Asian flu virus known as severe acute respiratory syndrome, or SARS, claimed the lives of 774 people and sickened another 8,096, according to the World Health Organization. While that’s a relatively small number of people compared to Asia’s total population, the virus wreaked havoc on Asian stocks, which were just recovering after the 1998 emerging markets crisis.
In less than 12 months, Hong Kong’s Hang Seng plunged 17.3%, to 8634.45, while the Japanese Nikkei fared worse, dropping 33%, to 7831.42. Other emerging market indexes fared similarly.
Spring is a common season for animal flu viruses to emerge. In March last year, another Chinese avian flu bug, which was a mutated form of the H1N5 avian strain, claimed the lives of four school children in Hong Kong and gave investors the jitters for a bit.
At the time, one Asia-based market participant recalled the SARS incident clearly. “When SARS hit Hong Kong, this place became a ghost town. I remember myself and a mate being the only people in the entire Lan Kwai Fong [nightlife district] drinking on a Thursday night,” said Gavin Parry, a director of Helmsman Global Trading in Hong Kong.
Potential Swine Flu Causes & Effects
Sunday, Canadian health officials said that swine flu is unlikely to be as deadly as SARS, mainly because they have spent years preparing for such an outbreak, even as the U.S. government issued a standard “medical state of emergency.” That’s probably true for the U.S. and much of Europe, too: developed countries are traditionally much less affected by flu epidemics than undeveloped ones.
As a result, on the political front renewed debates over Mexican border-control policy in the U.S. are also likely to spring up from the malaise.
Given the feeble state of global markets right now, any drop in consumer spending could have potentially serious consequences. Airline stocks, tourism companies (particularly ones which serve Latin American countries), and as a result, oil companies are all likely to feel any lingering effects of the flu bug. Producers such as Exxon (XON), BP (BP) and PetroChina (PTR), which have only just recently begun climbing again after a massive sell-off in oil, may fall back 10 - 15%.
In terms of buying opportunities, Helmsman’s Parry was advising his clients Monday morning in Asia to “break out the old SARS list of names that make face masks” for some short-term momentum, such as Japanese Hogy Medical (TYO:3593).
But the most likely securities to feel selling pressure are the emerging market ETFs. During the SARS crisis, U.S.-listed ETFs such as iShares MSCI Emerging Markets ETF (EEM), Vanguard Emerging Markets ETF (VWO), and Morgan Stanley Emerging Markets Domestic fund (EDD) were not yet thought up. Swine flu may pose the first serious challenge to these recently listed ETFs’ growth prospects.
In particular, Latin America-focused ETFs such as iShares S&P Latin America 40 Index (ILF) and iShares MSCI Mexico (EWW) look like they may take the brunt of the selling over the next week. The Mexican peso will also feel selling pressure, which could set off a round of further complications. Indeed, in Mexico the virus is already taking an economic toll, as the domestic government has ordered the closure of bars, movie theaters and churches. Officials stopped short of closing down work places, however.
Bloomberg reports one taxi driver citing a fifty percent drop in income since the virus was officially declared on April 24. “People don’t even want to leave their houses,” the driver told Bloomberg. “It was bad enough with the economic situation, and now it’s even worse.