Avian flu economics 5: What should investors do?

You know an issue has hit the mainstream when newspapers and magazine start offering investment advice about it. Yesterday's Observer  had an anonymous article, Bird flu: if symptoms persist, consult your stockbroker... , which contained these pearls of wisdom:

Research from the global portfolio strategists at giant American finance house Citigroup sums it up in a nutshell - sell British Airways and BP, buy Blockbuster and Nintendo. The lesson is that in the case of a serious outbreak, we will be too frightened to leave our homes.

The research paints a bleak economic analysis of the possible situations the world faces if the virus makes the leap from birds to humans. The worst case scenario - if the H5N1 virus becomes transmissable between humans - leads to slower global growth, rising risk aversion, declining interest rates and 'significant wealth effects'.

If the world suffers a virulent pandemic similar to the Spanish flu of 1918 which killed up to 50 million people, you should sell airlines, hotels and luxury goods companies, as well as oil, travel and hospitality companies.

On the other hand, the best case scenario leads to a temporary blip - the markets hate uncertainty - but this is, in fact, a buying opportunity, just as happened during the Asian Sars crisis three years ago. Buy telecoms, internet and, of course, drugs companies. 'While it is difficult to quantify the likelihood of a human pandemic, our analysis suggests avian flu is a rising risk to the global economic outlook,' says the report.

Crass? Certainly. Insensitive. Of course. (Now you know why the article was anonymous).

Despite its headline, Prevent A Pandemic, Make A Profit, Business Week's article is a little less exuberant, noting that "even a disaster such as a global flu pandemic will make someone richer":

Where there's disaster, there's opportunity for business. Consultants such as Booz Allen Hamilton Inc. and Kroll Inc. are already selling advice to business and governments on flu preparedness. Companies are stocking up on items thought to slow the spread of disease such as masks and hand sanitizers -- potential sales for companies like Beijing-based Kimberly-Clark (China) Investment Co. President Stephen Shao says his company is already developing new lines of medical masks, wipes, and hand-washing liquids.

Public health officials say that with the right early warning systems, they could spot a dangerous flu strain soon enough to snuff it out. The pot of gold: $1 billion-plus that countries have proposed to spend on enhancing global biohazard surveillance. Enter Applied Biosystems, the company that made the advanced sequencers that deciphered the human genome...

Comments

[Lord]

Housing and rents would fall, as would the prices of most consumer goods having fewer consumers. Interest would fall due to fewer borrowers. Wages would rise due to fewer workers.

[New Economist]

Lord, you seem to be assuming a much higher toll from avian flu than official estimates of 50,000 deaths in the UK. That would hardly dent current labour markets. Even if it were ten times that, it'd still be less than 1% of the population.

The skill shortages and wage rises which followed the Black Death and other calamities were of a much higher magnitude. I very much doubt we will see that.

As to retail sales, panic buying would likely see most food items off the shelf within a matter of days, as people stock up. However if many were quarantined or house-bound, consumer spending would then dwindle.

Hotels and other tourism-related services, transport and public entertainment (pubs, cafes, cinemas) would of course see their sales plummet - as we saw with SARS. But what we also saw, in both Hong King and Canada, was quite a rapid recovery once it was over.