FLU FINANCE

Your pocketbook is likely the last thing that comes to mind when discussing H1N1. Most people are focused on getting vaccinated and worried about themselves or their loved ones falling gravely ill. H1N1's possible financial fallout is an afterthought, if given any consideration at all.

But financial markets and the broader economy are not immune to the force of natural disasters and other nasty global events. It's been speculated, for instance, that Black Monday, which precipitated a worldwide bear market in October 1987, was partly caused by bad storm that knocked out power in the U.K., preventing London traders from getting to work.

More recently, the terrorist attacks of Sept. 11, 2001, sent markets into a tailspin. The Dow Jones Industrial Average dropped almost 15 per cent in the following week, a record drop until the credit crisis of last year.

So if these events can profoundly affect the world of finance, why not H1N1?

"I don't really know that there's ever been much demonstrated (about) how the markets react to pandemics," says John Lindsay, an associate professor at the department of applied disaster and emergency studies at Brandon University.

"I don't think that it's much of a stretch," he says about the potential impact the virus could have on the markets and the broader economy. He notes that SARS, avian flu and mad cow disease have all had negative economic effects on specific geographical areas in the past.

But because H1N1 is a pandemic -- which makes it a global problem -- the economic problems it might cause may be more widespread.

If enough people become sick with the flu, economic productivity could be hampered, says Jessica Wachter, professor of finance at the Wharton School at the University of Pennsylvania, who has studied the impact of major disasters on stock prices.

"Ultimately, this could affect future earnings of companies," she says. "Because stock valuation is determined in part by these future earnings, if earnings are lower than they otherwise would be, stock prices will also be lower than they should be."

Already, a few think-tanks are predicting H1N1 could hurt some sectors of the economy. On Monday, the Conference Board of Canada issued a report stating the H1N1 virus might add to the woes of the accommodation and food-service sectors, both financially fragile from last year's downturn.

"If individuals fear they might have to take time off of work, they may be less likely to spend and more likely to save because of this new source of uncertainty in their income," Wachter says.

Less spending ultimately translates into less revenue for corporations, which can lead to lower stock prices. But the virus also poses another threat to markets.

People worried about their income are less inclined to invest in the stock market, which can impede market performance, she says.

Then there's the worst-case scenario.

"If the pandemic turns out to be severe, the health system could be overrun," she says. "This would introduce a whole new source of uncertainty into people's lives and would greatly exacerbate the effects that I described."

Of course, at this point, the economic problems caused by H1N1 are speculative, she says.

But while it has yet to cause discernible economic malaise, the pandemic has shown a market upside for some investors. Yes, you read that correctly. There's a financial benefit to a deadly flu pandemic.

In fact, analysts, institutional investors and portfolio managers have likely been looking for a silver lining ever since reports of H1N1 deaths surfaced out of Mexico.

"The analysts within the sector watch these sorts of events as they crop up, and they often do specific analysis on how they will affect the sector," says Esko Mickels, a fund analyst with Morningstar Canada. "They're always looking for the next trade and idea."

Some financial institutions have even issued reports tracking the pandemic. Bank of America Merrill Lynch has a Weekly Death Rate & Influenza Monitor, which includes vaccine production and infection rate data.

At first glance, it appears the analysts are onto something. Health-care-related stocks and funds are on an upward trend, Mickels says.

But so far the consensus is the outbreak will have only a small positive effect on companies involved producing goods and services to fight the pandemic. And investor optimism in the midst of a bull market is just as likely the cause of higher pharmaceutical stock prices in recent months.

Still, larger pharmaceutical firms do stand to make a one-time profit from the pandemic, says Damien Conover, a pharmaceutical stock analyst with Morningstar in Chicago.

"We're looking in the neighbourhood of $2 billion in vaccine sales and, also, there are certain drugs that will be stockpiled in anticipation of this flu, namely Relenza by GlaxoSmithKline and Tamiflu by Roche," Conover says. "So, the net take-away from this is probably $4 to $5 billion all in."

But the increased revenues are most likely a one-time deal, unless pandemics are frequently recurring events.

"The fourth-quarter numbers will be very strong, and H1N1 vaccines and other related products will be very helpful in this regard, but it will only slightly move the needle upward," Conover says. "It's not going to be a major home run."

What may have a lasting effect on the bottom lines of pharmaceutical companies involved in fighting the pandemic is their increased bargaining power in health-care negotiations in the United States.

These companies are expected to pay $80 to $140 billion over 10 years to help cover drug costs for about 36 million Americans who would be covered under the government-sponsored plan.

"As pharmaceutical firms sit at the table, it's important for the public and the Congress to remember that during this outbreak of H1N1, without the deep pockets that pharmaceutical firms have, the ability to respond to these types of outbreaks could be jeopardized," Conover says.

Despite these apparent upsides, investing in pharmaceutical stocks is not for the risk-averse.

"I would suggest holding a basket of stock because at least you're getting diversification and avoiding company-specific risk as opposed to sector risk," Mickels says.

Pharmaceutical companies' stock prices are negatively affected by government regulation or liability if there is a problem with an already approved drug. (Merck & Co. shares were battered after the arthritis drug Vioxx had to be pulled from shelves over heart attack concerns.)

But the problem with investing in health-based mutual funds is you're not getting "a direct play on companies that are benefiting," Mickels says. "If you really want to invest based on the effects of the flu, and you've really done your homework, it is best to try and get specific exposure with select companies."

Then again, that kind of "exposure" is far from people's minds when they're fretting about their families' well-being.

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H1N1 flu exposure

If you're looking for portfolio exposure to pharmaceutical corporations experiencing an increase in sales from the H1N1 pandemic, here's a rundown of the bigger players.

Pharmaceutical firms:

Novartis AG (NVS on NYSE): Since hitting a low of about $33 a share on March 5, the Swiss pharmaceutical company, which manufactures the H1N1 vaccine, has hit more than $53 in October.

Roche Holding Ltd. (Public, OTC:RHHBY): This Swiss pharmaceutical company manufactures Tamiflu, one of the antivirals used to treat H1N1. Since March 5, its stocks have risen from $26 to $42.

GlaxoSmithKline (Public, NYSE:GSK): Besides manufacturing the antiviral Relenza, used to combat H1N1, it is also responsible for manufacturing vaccine for several nations, including Canada. Its profits were up 11 per cent in the third quarter, but it underperformed expectations of analysts. Still, its stock price has been as high as about $42, up from about $27 in March.

Sanofi-Aventis SA (Public, NYSE:SNY): This pharmaceutical company based in France is the world's leading vaccine manufacturer. Its stock price has traded as high as $40 compared to a low of about $24 in March.

Life science funds:

The mostly equity funds listed below are Canadian-managed funds, but because Canada is a small player in health sciences and pharmaceuticals, many of their holdings are international corporations.

Renaissance Global Health Care: This fund has increased eight per cent in the last six months and is up 0.9 per cent over the last year. It has more than $500 million in assets and has a management expense ratio (MER) of 3.14 per cent. The fund's five-year return is 0.8 per cent.

CI Global Health Science: In the last six months, the fund has produced a 20 per cent return and holds $143 million in assets. The MER is 2.36 per cent and is up 0.5 per cent after five years.

TD Health Science: This fund is up 6.2 per cent in the last six months, weaker than others, but it is up 1.4 per cent over five years, slightly above the benchmark, the S&P TSX Health Care Index. It has $143 million in assets. Its MER is 2.68 per cent.

Trimark Global Health Sciences: This fund has $121 million in assets under management and produced a 14.1 per cent return in the last six months. It is down 1.9 per cent over a 10-year period and has an MER of 2.85 per cent.

-- Morningstar.ca

Is destruction a good thing for the economy?

It's often been suggested disasters are the ultimate pump-primer for the economy. After all that destruction, one needs to rebuild, right? And one of the greatest human tragedies in history -- the Second World War -- is case in point. It is regarded as lifting the world out of the Great Depression, arguably the worst economic calamity of all time. But that doesn't mean investors make out well, says John Quinn, executive director of the Rapid City campus of National American University. The former Wall Street investment analyst recently wrote a column in the Rapid City Journal on the subject. The Spanish-American War, the First World War, the Second World War and the Vietnam War all coincided with bear markets, he argues. In an email to the Free Press, Quinn emphasizes that while investors may get beaten up, economies fare better. "The production of all war materials goes up, mobilization decreases unemployment (by 1943 the U.S. unemployment rate had fallen to 1.3 per cent from 24 per cent in 1933), and after a war, veterans and their families have huge pent-up demand for all consumer products," he writes.

Republished from the Winnipeg Free Press print edition November 14, 2009 B14