The sudden appearance of a new strain of influenza has become a dramatic lesson in stock market dynamics. If we apply the chaos theory to the market, a cough in Mexico can cause an economic storm in Asia.
Markets in Asia and Europe dropped sharply on speculation that the outbreak of swine flu will curtail travel and consumer spending. Shares of airlines and hotels were particularly hard hit, which is not surprising. The price of corn and soybeans dropped as well on speculation that an outbreak of swine flu may reduce demand for pork, and consequently the grains that feed them.
The World Health Organization called the outbreak a “public health emergency of international concern,” raising concerns of a similar outbreak to the H5N1 bird virus that spread across Asia in the past few years killing millions of poultry and several hundred people and slowing trade.
Asian money managers expressed fears that like the previous bird flu cases, this outbreak may slow international trade and disrupt government’s effort for an economic recovery.
On the other hand, shares of companies that will benefit from the outbreak have risen. The obvious ones are Roche (OTC:RHHBY), the maker of Tamiflu, and GlaxoSmithKline (GSK), which produces Relenza, the other medication used to combat flu symptoms. Basel, Switzerland-based, Roche, which said it has an ample supply of the Tamiflu treatment that can reduce swine flu symptoms, added 3.9 percent in Europe to 145 Swiss francs. Chugai Pharmaceutical Co., the Tokyo-based unit of Roche, surged 14 percent in Asia to 1,845 yen. Roche gained a similar amount in the U.S. market on Monday, while Glaxo climbed even more, up to a 7% gain.
Similarly, shares of Biota, the small Australian company that holds the patent for Relenza, soared nearly 80% in that market.
Another company, this one based in the U.S., will also benefit, and that’s Gilead (GILD), which holds the patent for Tamiflu and will receive a percentage of Roche’s profits. It’s a much larger and more diversified company than Biota, however, and obviously won’t gain nearly as much. Other companies that will benefit include the makers of surgical masks, which would include 3M (MMM) and Kimberly Clark (KMB). Of these, Kimberly Clark would be the better choice for investors. The company maintains a Web site for preparedness in case of a pandemic.
Still another beneficiary is Quidel (QDEL), which makes rapid diagnostic kits for the flu.
If the market holds to previous patterns, the stocks that plummeted the most will regain ground over the next few days, while those that have climbed the highest and fastest will pull back, leaving those that have made only modest or even negligible gains, like Gilead and Kimberly Clark, in the best positions.
Disclosure: Long GILD