The number of confirmed cases of swine flu more than doubled over the weekend, with the World Health Organization (WHO) reporting 898 people in 18 countries infected with the influenza type A H1N1 virus by yesterday. Although swine flu has already caused jitters in financial markets worldwide, fund managers and analysts are taking things in stride and are urging investors not to overreact.
The WHO says the sudden rise in the number of cases was largely due to ongoing testing of a backlog of specimens in Mexico, rather than actual new cases of people getting infected. Apart from Mexico, the following countries have reported laboratory confirmed cases: Austria, Canada, China, Costa Rica, Denmark, France, Germany, Hong Kong, Ireland, Israel, Italy, Netherlands, New Zealand, South Korea, Spain, Switzerland and the UK.
When the WHO raised the alert level for swine flu to five from four, the organisation's director-general Margaret Chan said that influenza pandemics must be taken seriously precisely because of their capacity to spread rapidly to every country in the world. But Chan stressed that "on the positive side, the world is better prepared for an influenza pandemic than at any time in history". With a level 5 WHO alert, a pandemic is considered imminent. The highest alert level is 6, which is the pandemic phase.
Swine flu has brought back memories of the deadly Severe Acute Respiratory Syndrome (Sars) that hit Hong Kong and other parts of the world in 2003 (cases of Sars in 2002 weren't widely known until the following year). There were more than 8,000 cases of Sars, including more than 700 deaths, reported between November 2002 and July 2003. Within a matter of weeks in early 2003, Sars spread from the Guangdong province of China, rapidly infecting individuals in 37 countries around the world. It affected stock markets, real estate prices, and the retail business in Hong Kong and other parts of Asia. Worldwide, airline travel was also significantly affected by the Sars scare.
Back in 2003, the height of Sars hit just as the US announced in late-March that it was going into war with Iraq. This time around, swine flu is spreading just as the world is fighting a global financial crisis and is in the midst of the worst recession since the Great Depression of the early-1930s.
Fund managers and analysts are generally calm about the potential effects of swine flu on the world's economy and financial markets.
"While there is reason for concern, the experience with Sars and bird flu highlighted that worst case pandemic fears don't usually come to pass," says Shane Oliver, Sydney-based chief economist and head of investment strategy at AMP Capital Investors. Like other fund managers and analysts, he puts his faith behind the WHO's battle-cry that the world is better prepared for a viral pandemic now.
"The key for investors is to be alert, but not alarmed," Oliver says.
Just as it was with Sars, travel-related shares on global stock markets have been among the early victims of the heightened concern. Brian Deacon, head of emerging markets at Fortis Investments, notes that 40% of hotel reservations have been cancelled in Mexico in late-April.
While a flu pandemic -- if it amounts to that -- would first and foremost be a human tragedy, the economic and financial market impact would also be significant, AMP's Oliver notes. That said, he says there is a real danger of over-reacting to the outbreak of swine flu and it could just turn out to be a nasty version of the flu.
There were three influenza pandemics in the last century -- which took place in 1918-19, 1957 and 1968. The 1957 and 1968 pandemics are estimated to have killed up to 4 million people. The 1918 Spanish flu pandemic was the most severe. While the mortality rate was low, up to 50 million people were reported to have died worldwide. In the US, the first case was reported in March 1918 and deaths peaked sometime between September 1918 and March 1919. With a big proportion of the population staying at home, economic activity was severely disrupted, although this was compounded by the ending of World War I, Oliver notes.
Although not classified as a pandemic, the Sars outbreak is a more useful guide to predicting the economic and financial market damage that swine flu might cause if it turns into a pandemic. Although the number infected was not that great, Sars had a significant negative impact on the hardest-hit countries, where people mostly stayed at home for fear of catching the disease. While the number of new cases peaked in April 2003, GDP in Hong Kong and Singapore (two of the countries most affected) fell by over 2% in the June quarter of 2003 as retail sales fell, workers stayed home and travel dried up. 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 shares coincided with signs that the number of new Sars cases was peaking.
Most pandemics have taken six to 18 months to run their course and usually ease as measures are taken to slow their spread -- such as hygiene, quarantining, banning gatherings, preventing travel. Sars ended quicker due to the nature of the virus and rapid action by authorities.
Travel-related stocks are most vulnerable to swine flu fears, followed by consumer-related shares whereas healthcare stocks (particularly manufacturers of anti-virals) could continue to do well, Oliver says.
Economies most vulnerable to swine flu -- if it spreads further around the world -- would be those that have sizable tourism, retail, and transportation sectors, according to Credit Suisse. In Asia, these include Hong Kong, Malaysia, Singapore, and Thailand, the firm says, adding however that none of is likely to suffer from a lasting impact on their currencies.
A full-blown swine flu pandemic with millions of deaths could, however, deepen and extend the global recession already underway -- global travel would virtually cease, workers would stay at home and the supply of goods and services would be seriously interrupted, Oliver says. If this were to occur, the bear market in shares would likely resume and cash would be the place to be, he adds.
But Oliver chooses to stay positive.
"While this flu scare, though so far contained among the schools affected, has brought back memories of the deadly Sars that hit Hong Kong in 2003, the experience with the Sars outbreak of 2003 and the pandemonium over bird flu with predictions it could kill as many as 150 million people tell us that the worst case fears of pandemics usually don't come to pass," Oliver says. "Hopefully the same will apply to the swine flu outbreak and any setback in shares driven by pandemic fears will just provide a buying opportunity.
The small number of deaths outside of Mexico so far highlights how anti-virals appear to be effective and the world is better prepared for a pandemic after the scares of recent years. So while there might be a bit of short-term volatility, there is unlikely to be a major impact on share markets.
When it comes specifically to Mexico, Fortis Investments' Deacon also takes his cue for the experience with Sars and predicts that the swine flu's economic impact will be reasonably short lived and concentrated on second quarter GDP growth. Fortis Investments' emerging markets team has gone further underweight in Mexico due to the current swine flu worries. The team was already underweight in Mexico due to the deterioration in company earnings and an uncertain economic outlook.
"The impact of the virus on the Mexican economy will depend on its progress over the next few days. We will have to follow the frequency of new cases and more importantly, the ability of the authorities to control it. The longer it lasts, the greater the potential effect on the economy," Deacon says. "As things stand, schools are closed until May, theatres are not open and the streets are much emptier than usual. All of which could have a broader effect on the domestic economy as local businesses suffer and we witness damage to any prospect of an already fragile economic recovery."
Over at Moody's, swine flu has so far not affected any ratings of Mexican corporates. The ratings agency notes, however, that if the outbreak turns out to have material and sustained economic consequences, beyond mere short-term interruptions of certain business activities as currently observed, it could adversely affect ratings or outlooks of a number of Mexican corporates. The companies most vulnerable to the outbreak would be those whose cash generation is directly weakened by the outbreak for a prolonged period (because of lower demand or mandatory suspension of certain operations, for example) such that their financial positions deteriorate materially and are no longer in line with the assigned rating levels or outlooks.
Frequently asked questions about the swine flu, from the WHO website:
How do people become infected with influenza A(H1N1)?
Outbreaks in humans are now occurring from human-to-human transmission. When infected, people cough or sneeze, infected droplets get on their hands, drop onto surfaces, or are dispersed into the air. Another person can breathe in contaminated air, or touch infected hands or surfaces, and be exposed. To prevent spread, people should cover their mouth and nose with a tissue when coughing, and wash their hands regularly.
What are the signs and symptoms of infection?
Early signs of influenza A(H1N1) are flu-like, including fever, cough, headache, muscle and joint pain, sore throat and runny nose, and sometimes vomiting or diarrhoea.
Why are we so worried about this pandemic possibility when thousands die every year from seasonal epidemics?
Seasonal epidemics occur every year and we are able to treat the virus with seasonal vaccines. A pandemic is a worldwide epidemic. It is a new virus and one to which populations will have no immunity.