Weighing pandemic's impact
By MICHAEL R. SESIT (The Wall Street Journal)
Updated: 2005-11-25 12:46
PARIS -- If avian flu sparks a global flu pandemic, the world will have a lot
more to care about than financial markets. But that hasn't stopped economists
and strategists ruminating over the possible impact on everything from economic
growth to interest rates to stock prices and foreign exchange.
Concerns about a possible pandemic have risen with the emergence of the H5N1
bird-flu virus, which has jumped from birds to humans, killing 67 people in Asia
in the past two years. Some scientists fear that if the virus mutates to the
point where it can be transmitted between humans, the world could face a
"While it is difficult to quantify the precise likelihood of a human H5N1
pandemic, analysis suggests that avian flu is a rising risk to the global
economic outlook," says Robert Bonte-Friedheim, an equity analyst at Citigroup
specializing in medical affairs and lead author of a recent report on avian flu.
The prospect of that is still viewed as extremely low. But the World Health
Organization estimates that a relatively mild global flu outbreak could cost two
million to seven million lives. But others contend that a truly virulent virus
could rival the 1918-1919 "Spanish flu" in which anywhere from 20 million to 100
million people died.
"The bottom line is that flu pandemics have already developed in the past and
may well show up again in the future, with potentially devastating consequences
for the global economy and markets," says Lorenzo Codogno, co-head of European
economics at Bank of America.
A relatively mild -- and containable -- outbreak of bird flu would likely
slow economic activity, cause stocks to fall, bonds to rally and trigger sharp
jumps in so-called haven currencies, such as the Swiss franc and possibly the
U.S. dollar and sterling. But these effects should prove temporary, contend
Citigroup analysts. In fact, they regard the equity selloff as an opportunity to
buy stocks that would be expected to rebound with economic growth.
A full-blown pandemic is another story. Even people who regard predictions of
a repeat of 1918-1919 as alarmist acknowledge the ruinous impact of such an
event. "A virulent, global outbreak of avian flu, which is still considered to
be a low-probability event, would cause global economic activity to decline,
raw-material prices to collapse, risk aversion to rise, monetary policy to ease
and interest rates to fall," says Ben Walker, a fund manager at Gartmore
Economies would be buffeted by curtailed individual travel, increased
absenteeism from the workplace, reduced shopping, a steep drop in consumer and
business confidence and government-imposed quarantines.
Meanwhile, the combination of increased investor aversion to risk and slowing
global growth would damp cross-border investment. That, in turn, should be bad
news for the currencies of countries with large current-account deficits that
rely on financing from abroad, such as the U.S., Australian and New Zealand
dollars, the U.K. pound, South African rand and Mexican peso, says Marvin Barth,
a Citigroup currency economist.
Slowing growth, especially in Asia, would also put a big dent in the demand
for raw materials, particularly jet fuel. "Severe constraints on global mobility
will have a huge impact on oil demand," say Citigroup analysts. "However, some
commodities, such as gold and silver, could benefit from a 'flight-to-quality'
trade," says Gartmore's Mr. Walker.
To get a notion of what might happen in various markets, investment
strategists often use the outbreak of severe acute respiratory syndrome, or
SARS, in 2003 as a template. East Asian growth shrank. Deflation set in as
consumer prices fell in Hong Kong, China and Singapore.
In Hong Kong, tourist arrivals plunged, hotel-occupancy collapsed and the
stock market tumbled 10% in six weeks. Consumer discretionary, industrial, bank,
materials and real-estate stocks in Asian markets excluding Japan fell 7% to
17%; utilities and health-care stocks rose slightly. Post-SARS, the sectors that
fell the most came roaring back. Even so, SARS may be too-optimistic a
benchmark. It was short-lived and mostly restricted to four Asian countries.
"In SARS, the market didn't start coming back until the caseload of new
patients was on a sustained downward trend," says Citigroup's Mr.
Bonte-Friedheim. "With a potential H5N1 influenza, it would probably be a long
time before that point is reached."
Under a pandemic scenario, the stock sectors that should perform well include
companies that make antiviral drugs and vaccines, hospital chains,
cleaning-product manufacturers, home-entertainment providers, telecommunications
and Internet-related companies and utilities, according to Citigroup and
Gartmore's Mr. Walker.
Meanwhile, Standard & Poor's notes that "businesses that depend on large
numbers of people congregating -- such as airlines, lodging, leisure and
restaurants -- would suffer serious setbacks." Other "losers" include
shopping-mall operators, luxury-goods companies, oil companies and mining and
For all the prognosticating though, some contend that such an event would be
so serious that there is little that investors can do. "I don't think you can do
anything about it," warns Crispin Odey, head of Odey Asset Management in London.