Microsoft word - swine flu - oi #11 2009.doc

Edition #11
Swine flu - pandemic or just another flu pandemonium?
Key points
between September 1918 and March 1919 (with possibly a • Swine flu deaths in Mexico and the spread of cases double peak), but cases were still reported as late as 1920. around the world have lead to fears of a global flu In Australia, the disease hit in January 1919, infected over 30% of Sydney’s population and killed over 11,000 by the end of 1919. With a big proportion of the population staying Coming at a time when the global economy is already at home, economic activity was severely disrupted, weakened, pandemic fears have already caused although this was compounded by the ending of World War nervousness in share markets and more weakness is I. US industrial production slumped 18% between March 1918 and March 1919. Australian real GDP slumped 5.5% • While there is reason for concern, the experience with in 1919-20 (but then rebounded 13.6% in 1920-21). The SARS and bird flu highlight that worst case pandemic share market impact is hard to discern given the volatility fears don’t usually come to pass. The world is also associated with the ending of WWI, however US and better prepared for a viral pandemic now. The key for Australian share markets rose through much of the investors is to be alert, but not alarmed. Introduction
The SARS outbreak of 2003 is perhaps a more useful As if investors didn’t have enough to worry about, concerns guide to predicting the economic and financial market about another flu pandemic – swine flu in this case – are damage a pandemic might cause. After emerging in China now causing concerns globally following deaths in Mexico around February 2003, SARS infected about 8000 people and its spreading to various parts of the world. The World (mostly in Asia) in 30 countries over a five month period Health Organisation has declared the outbreak a “public and had a mortality rate of about 10%. While the number health emergency” and raised its pandemic alert rating to 4 infected was not that great, SARS had a big negative (on a scale that runs to 6). Global share markets have impact on the countries most affected as people stayed been rattled by concerns about its economic impact with home for fear of catching it. While the number of new travel related stocks being hard hit so far. While a flu cases peaked in April 2003, GDP in Hong Kong and pandemic - were it to eventuate - would first and foremost Singapore (two of the countries most affected) slumped by be a human tragedy, the economic and financial market over 2% in the June quarter of 2003 as retail sales fell, impact would also be significant. The swine flu outbreak workers stayed home and travel dried up. Growth then has come at a time when the world is already weakened by the global financial crisis. That said, there is a real danger SARS experience in 2003, HK and Singapore
of over-reacting to the outbreak of swine flu; it could just turn out to be a nasty version of the flu. Recent Real GDP,
experiences with SARS and bird flu highlight that worst Number of new
March qtr
of people
SARS cases, RHS
case pandemic fears don’t always eventuate. This note 2003=100
Past experience – Spanish flu, SARS and bird flu
Singapore GDP (LHS)
Before looking at the swine flu outbreak causing concern it is worth reviewing past pandemics – both real and feared. There were three influenza pandemics in the last century: 1918-19, 1957 and 1968. The 1957 and 1968 pandemics are estimated to have killed up to 4 million people. However, the 1918 Spanish flu pandemic was the most severe. While the mortality rate was low, up to 50 million Source: Thomson Financial, AMP Capital Investors people died worldwide. In the US the first case was reported in March 1918 and deaths peaked sometime Reflecting SARS, Asian shares fell in April 2003, even though global shares started to move out of a three year bear market from March. The April 2003 low in Asian less able health care system. It is also worth noting that shares coincided with signs the number of new cases was hundreds of people die from flu every year anyway. peaking, and this was well ahead of the economic • More significantly, while there is no vaccine that protects against swine flu, two anti-viral drugs, Tamiflu and Relenza, have been effective against the new SARS pushed Asian shares lower, but they turned as
the number of cases peaked
strains according to the US Centers for Disease Australia is well prepared with a stockpile of nearly 9 Asian shares, ex Japan
million doses of anti-viral drugs, including Relenza. Australia also has a well developed plan to deal with a pandemic. Today many countries are also far better Global shares
prepared given all the concerns about bird flu over the last few years. Less developed countries are of course 9% underperformance by
Asian shares at height of
SARS pandemic in April
• It is also worth noting that the world is mobilising against the threat so this may slow its spread. The economic and financial impact
Source: Thomson Financial, AMP Capital Investors Coming at a time when the world is in its worst
Most pandemics have taken six to 18 months to run their recession since the great depression and investors are
course and usually peter out as measures are taken to still very nervous, concern about the swine flu
slow their spread (eg, hygiene, quarantining, banning outbreak turning into a global pandemic could drive a
gatherings, preventing travel). SARS ended quicker due to setback in share markets. Travel related stocks are most
the nature of the virus and rapid action by authorities. vulnerable followed by consumer related shares whereas In 2005 and early 2006, there was significant concern that health care stocks (particularly manufacturers of anti-virals) a severe strain of bird flu (caused by a virus called H5N1), which was resulting in human casualties mainly in parts of A full blown swine flu pandemic with millions of deaths Asia where people had contact with chickens, would could also deepen and extend the global recession already mutate into a form that was readily transmissible between underway - global travel would virtually cease, workers humans. However, this didn’t really eventuate and as such would stay at home and the supply of goods and services the economic impact was modest although it did cause would be seriously interrupted. If this were to occur the bouts of volatility in share markets in 2005 and early 2006. bear market in shares would likely resume and cash would What do we know about swine flu outbreak
As it’s early days there isn’t a lot of information on the However, while there is reason for concern and it is
swine flu virus now causing concern. However, here is a easy to dream up nightmare scenarios, the experience
with the SARS outbreak of 2003 and the pandemonium
over bird flu with “predictions” it could kill as many as
The swine flu virus causing concern (influenza type A, 150 million people tell us that the worst case fears of
H1N1) appears to contain genetic material from human pandemics usually don’t come to pass. Hopefully the
viruses, North American bird viruses and pig viruses. It same will apply to the swine flu outbreak and any setback may be completely new or it may have been around for in shares driven by pandemic fears will just provide a a while having become only recently detectible due to buying opportunity. Certainly the lack of deaths outside of new testing and surveillance procedures. Mexico so far, signs that anti-virals appear to be effective • As a number of cases have had no direct exposure to and the better preparedness of the world for a pandemic pigs, the concern with this virus is that it has the ability after the scares of recent years are positive signs in this to transmit between humans. This is something that the regard. These considerations suggest that while there H5N1 bird flu virus never really attained (at least not so might be a bit of short term volatility there is unlikely to be a major impact on share markets. That said, given the risks • In Mexico it also seems to be hitting young adults (20 to and with many flu pandemic experts agreeing that a new pandemic could occur any time, it will be necessary for • While it has apparently killed 150 or so people in investors to keep a close eye on how swine flu develops. Mexico, the death rate is unknown as thousands may The key for investors at this stage is to be alert, but not have been infected and simply recovered. So far there have been no reported deaths outside Mexico. For example, some New Zealand students who are thought Dr Shane Oliver
likely to have contracted the swine flu after a trip to Head of Investment Strategy and Chief Economist
AMP Capital Investors

Mexico don’t have severe symptoms and some reports indicate they appear to be recovering. As such the deaths in Mexico may have something to do with its Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591) (AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.


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