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 today 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.
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.