Judging from the FTSE’s latest movements, it would appear that UK investors’ purported overreaction to the H1N1 virus (Human swine flu) has abated. This week, investors have switched their primary focus to the stress test results (leaked yesterday) which is a step towards clarifying the US banking sector’s financial health.
Despite the alteration of investor focus, word from Margaret Chan, the Director General of the World Health Organisation is that the potential global threat of swine flu is far from extinguished.
What is the economic impact?
If focusing on the possible economic impact of the recently acknowledged H1N1 virus, three key phases can be identified: economic loss due to death; work absenteeism and ‘avoidance behaviours’ such as reducing air travel, visits to shopping centres and exposure to large groups of people. The World Bank estimates that avoidance behaviour would account for two-thirds of losses to local economies. The possibility of these outcomes combined with an already ailing global economy has created tension amongst some investors.
Identifying the potential future winners and losers
Last week’s global stock market movements gave a vivid early indication of which industries could benefit from the worsening of the flu threat and which industries could potentially suffer.
Companies operating in the travel and tourism sectors were targeted by sellers, with British Airways the biggest victim in a sell-off of airline stocks.
However, the focus on swine flu may be resulting in investors paying particular interest to biotech and healthcare funds.
Whereas biotech funds invest solely in companies involved in developing new drug treatments and therapies, the latter have a wider jurisdiction and also invest in other healthcare related companies such as the large pharmaceutical giants.
These funds investment performance over the past 12 months have been good; AXA Framlington Biotech fund is up 23% while Franklin Templeton biotechnology fund is up 24%. Perhaps investors’ flight to defensive stocks is paying off. However, the funds shorter term performances have been more muted.
Where do we go from here?
Although last week’s negative investment sentiment has been mostly attributed to the media coverage on the H1N1 virus, it is impossible to isolate and identify specific effects of an individual event on the stock market. Just as the detrimental outcome of SARS on global and in particular Asian markets could have been stoked by the bursting of the Tech bubble, so too can responsibility for last week’s jitters be partially claimed by negative economic data being disseminated to investors.
The severity of the H1N1 outbreak and the strength of its influence on global markets are dependent on how successful governments are in utilising the knowledge gained from previous pandemics to respond to this opaque threat.
Savvy investors, amidst this current uncertainty will yet again be required to use their medium to long tong term investment objectives as an antidote to the frenzied behaviour brought about by swine flu.