Swine flu could turn into another SARS. The WHO (World Health Organization) has just raised the influenza pandemic alert from 3 to 4 and warned that the swine flu outbreak in America (Mexico, US and now spreading to Canada) could develop into another pandemic like the SARS outbreak we saw in 2002-2003. During that period, the STI dropped nearly 38% over a one-year period. However, in the aftermath of SARS, we also saw the index staging a remarkable recovery of 58% in the 10 months following the incident.

Stocks likely to be affected. During the last SARS outbreak, businesses that were affected included food stocks (especially those which dealt with pork-related products), travel-related companies, as well as retail-related companies (shoppers stayed home as the virus was easily spread through close contact). This time around, we believe that the same businesses will also be affected, although the extent of the impact may be lessened by the fact that many of these companies have already been sold down sharply due to the economic downturn. In fact, current valuations are already relatively close to the valuations seen during the height of the SARS scare.

Stocks that could benefit. On the other hand, we also saw that some businesses benefited indirectly from the SARS incident. Some of these businesses included telcos (as corporates curbed their air travel and relied on teleconferencing and video calls to conduct their meetings). Other businesses that offered an alternative source of food (such as fish) also performed admirably during the SARS period. On the valuation front, most of these stocks have fallen sharply due to the economic crisis and we believe there may be room for capital appreciation.

More time needed to assess impact on economy. Given that the outbreak is still in its early stage and health experts are themselves learning more about the virus, more time will be needed to ascertain the extent of impact on the global economy. If the virus turns out to be less virulent than expected, investor sentiment may recover quickly, supporting share prices. As it is, we have already seen the earlier signs of market reaction yesterday, and this is a situation that warrants close monitoring to ascertain the impact and extend of the spread in the coming days.