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Analysis: Assessing the impact of swine flu

The public is becoming increasing concerned about the effects swine flu will have on their health, but what about the impact on the economy?

Since the beginning of the year, the more optimistic commentators were promising a recovery in Britain, albeit a muted one, despite a weakening in the recent market rally. However, some fund managers are turning their attention to whether a swine flu epidemic could scupper any sort of recovery and prolong the downturn longer than was initially forecast.

It was reported that over 100,000 Britons will have contracted swine flu by the end of August, and cases in America have surpassed 1m, but mortality rates remain low for both regions—about 0.5%.

However, the number of cases is reaching epidemic levels— defined in Britain as more than 200 cases per 1,000 people. As at July 23 there were about 220 cases per 1,000.

Whilst the symptoms remain relatively mild, and the number of deaths are much lower when compared with seasonal flu, analysts are beginning to factor in the effect on the economy should the situation worsen.

The Ernst & Young Item Club, a forecasting group, estimates that a serious epidemic of the virus could cause a 3% contraction in Britain’s GDP. This is on top of the 4.5% contraction it has already forecast caused by other factors and assumes the pandemic will last six months from August, with an infection rate of 50% and mortality rate of 0.4%.

“The main effect of such an epidemic on the supply side would be from employees staying off work because they or their dependents were ill,” says the Item Club’s quarterly Economic Outlook for Business. “On the demand side, spending on discretionary goods and services such as restaurant, travel and tourism would be likely to fall as people stayed away from public places to avoid infection.

“Uncertainty about these developments would be likely to make businesses further postpone investment projects. Item estimates that such as epidemic would cut 3% from GDP in 2009 and a further 1.7% in 2010, hitting the economy hard just as it could have been starting to recover from the credit crunch.”

Indeed some managers have confessed swine flu has affected their investment decisions based on the factors mentioned in the above quote.

Mark Page, the head of European equities at LV= Asset Management, says, although the impact will probably be short-term and it depends on how many will be contaminated, he is being cautious.

His co-manager, Laurent Millet, says: “It might be short-lived—from September to November—but if companies have lots of debt they might not be able to re-finance the shortfall in cash if they still have issues with their balance sheets.”

For this reason he only holds high quality companies. He has no airlines or hotels, but this is a long-held decision merely reinforced by swine flu. He also has a lower weighting to transportation companies.

Ben Russon, the manager of the Newton UK Opportunities fund, says swine flu has further enforced his negative view on consumer stocks. He also has no exposure to airlines, leisure, transport and tour operators.

“This was the case before but swine flu reinforces the risk. At the moment people are just talking about the threats and are not using it as a reason to downgrade expectations. As it becomes more real, people will explicitly factor the risks into analyst forecasts.”

Both managers have also pointed to exposure they have in healthcare or pharmaceutical companies that are seeing productivity levels increase owing to swine flu.

Millet and Page at LVAM have increased their healthcare weighting by 1.5% but admit their consciences are troubled by making money in this way.

They hold Sanifi, the provider of the vaccine, and Roche, the company which invented and manufactured Tamiflu.

Millet says: “The fund has already begun to benefit but I think it is still too early for this theme.” Page adds: “It is not prevalent at the moment as it is the summer but swine flu has the potential to be a lot worse than people think.”

Russon also holds Roche and GlaxosmithKline but says, broadly, there are other things to worry about.

“If the green shoots don’t come through then we are back to where are were two years ago. Swine flu is part of our thinking but not the main driver of investment positions.”

One place that has seen a measurable impact on its economy is the flu’s place of origin—Mexico. Official estimates from the Mexican government say that 0.3% was knocked off GDP owing to swine flu which caused businesses and schools to shut down.

Frances Hudson, a global strategist at Standard Life, is in the camp that while it does cause some concern, swine flu will not reverse any chance of a recovery as she is not expecting a recovery to be consumer led.

She says: “The prospect of catching swine flu may stop you going to the shops, restaurant or theatre but in terms of work we are not really seeing any changes in behaviour patterns.” She adds management may be talking to staff about the possibility of working from home but at the moment it is all hypothetical.

Although she says full impact has not been seen as many people are away on holiday, there is plenty of spare capacity in Britain owing to the high unemployment levels, and infection is mainly occurring through young children which do not have a high impact on the economy.

There are concerns that it could mutate into something more deadly, but Hudson is more worried about pharmaceuticals switching so much attention from seasonal flu to swine flu.

“Pharmaceutical companies have been switching production to manufacture drugs to this particular strain of flu. This might affect us in the winter when there are not enough vaccines for seasonal flu, which is a bigger killer anyway.”

In Hudson’s words, whatever happens it is not going to be cheerful.

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Future tense

Presented with the prospect of a few weeks away from these pages, I find myself contemplating the future even more than one might expect of someone who, at least in theory, is supposed to concern himself with investment.


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