Take Swine Flu Investing Advice with a Big Grain of Salt

As fears of a swine flu pandemic increase (emphasis on fears) market jitters are rising accordingly due to the uncertain scale and cost of the current outbreak. Citigroup strategist Tobias Levkovich takes a stab at just what sort of sickness swine flu could inspire in stocks, trade and the global economy.

While we do not want to diminish the human cost of such awful developments, the investment community is more likely to focus on the economic price. Health care stocks could benefit, while economically sensitive ones could suffer. In addition, we have worried about protectionist policies coming to the fore and it is plausible that some “America First” types may push for more aggressive action on the Mexican border and on immigration, with a populist flavor behind it. Again, we do not see that kind of legislative effort as being perceived as welcome by markets. US-Mexico trade is significant and the Mexican economy is already being hurt by a drop in tourism, exports to the US and weaker oil prices. Accordingly, the news cannot be seen as good for stocks in that country. We would refer investors to the research put out by Citi’s Latin American strategist, Geoffrey Dennis, who has been cautious on Mexican names and underweight the market since mid-December.

But:

We do not see the swine flu development as the factor that will derail the rally, but we are aware that many investors have not participated in the move and thus want some sort of pullback, so they do not underperform. In that sense, we would expect some in the investment community to seize on swine flu as a reason to argue for selling into the rally. We continue to think that skepticism is the dominant feeling in the marketplace and any pullback should be taken advantage of by investors who have been surprised to the upside by 1Q09 earnings thus far.

The report outlines a few investing themes:

Possible losers: The pork industry. Industries that deal in travel or "confined spaces" (airlines) or highly public places (hotels, restaurants, retailers, etc.).

Possible winners: Drug makers (Gilead, etc.). Less obvious: home entertainment plays including "video distributors, video game producers and even pay-per-view movie distribution (through cable and satellite television providers).

Me: Take the above advice (and nearly all swine flu investing tips) with a big grain of salt. This sort of armchair psychologizing over investor sentiment looks murky even for an economist. If anything, it's more illustrative of how crisis-related investing advice gets extrapolated past a point of usefulness. Investing opinions (aside from directly correlated plays like vaccines) look more like a forced reaction to the news cycle. Point being, global pandemic is probably bad for a weak stock market but beyond the very obvious (Who wouldn't sell Mexico?) nobody really knows what to expect.

As with avoiding the flu itself, best to wash your hands and move on.

Comments

[kelm:]

Actually, depending on the company, some pork producers can benefit. Take AgFeed industries as an example (yes I own the stock). It is the largest pork producer in China. China just banned pork imports from Mexico, US and Canada. That is, they just reduced AgFeed's competition. What would hurt the company - mass culls of pigs or a reduction in consumption. Culls are not being talked about, in fact they have not even found the strain at the pig farms by the village of patient zero. I don't think we will see Chinese demand decrease either. That is just one example of where the market gets it wrong initially and a situation like this actually creates an opportunity in the very industry that initially one expects to be hurt.

Apr 29 09:18 AM

[Salman Khan:]

While there is no doubt that the economy will suffer due to swine, it's not that money making opportunity will disappear altogether. In fact the outbreak will give rise to a new class of wealth creators, albeit for short period of time. check out the link for a complete list:

www.stockozone.com/200...

Apr 29 09:26 AM

[YoYoMama:]

I'm here in Texas, at Mexico's back door, and I can tell you that we just aren't all that concerned. No one is even talking about it. It's just not that big of a deal.

When there's a bigger news story to cover, the media will move on and this frenzy will pass.

Apr 29 09:47 AM

[mollytjm:]

Excellent article!
It's true..if you scare people enough, they'll buy more newspapers and watch more tv and get more scared and on and on and of course the drug companies are big advertisers in the above so there are extra agendas focused on creating more fear. Yes, it's the flu, which can always turn nasty, but making rush investments, banking on medical disasters, isn't a very good idea. This flu is a horse with a blindfold on. It could just stay in the stall and actually lose $$$ for drug companies developing a vaccine for something that doesn't keep going or that mutates (as a virus can do in a matter of hours). And remember the last swine flu vaccine... the drug companies got sued because some people died from the vaccine. This is all murky stuff. Better to stick to investing in value companies that deal with the knowable.

Apr 29 09:57 AM

[cameroni:]

After my first initial reaction of dread at the potential of a pandemic I have started to reassess the threat. Economic chaos seemed a foregone conclusion. But market cynicism seems to have factored in the "Red Herring" of this media manipulation and discounted it already. Stocks only briefly slowed their upward trajectory, some opportunistic buying took place and pretty much everyone has concluded that this whole "pandemic" talk, if not a media manipulation is certainly not sizing up to have any real impact on the economy. It remains to be seen though if it stays that way. Border closures, although unlikely, would really turn a lot of heads and shake things up. Until then, I think I am going along with the "Don't worry, be happy". camp.

Cam

Apr 29 05:03 PM