Lots of people have been pointing out that the fear of swine flu might out-pace the public health threat, just as the earlier worries about SARS did. But that doesn’t mean swine flu won’t have a big effect on the markets. As Daniel Harrison points out, in less than 12 months after the outbreak of SARS, Hong Kong’s Hang Seng plunged 17.3% while the Japanese Nikkei dropped. This was despite the fact that SARS claimed the lives of only 774 people.
So how do you trade the swine flu outbreak? Harrison has some suggestions. Basically: go long face masks and short related developing countries.
In terms of buying opportunities, Helmsman’s Parry was advising his clients Monday morning in Asia to “break out the old SARS list of names that make face masks” for some short-term momentum, such as Japanese Hogy Medical (TYO:3593).
But the most likely securities to feel selling pressure are the emerging market ETFs. During the SARS crisis, U.S.-listed ETFs such as iShares MSCI Emerging Markets ETF (EEM), Vanguard Emerging Markets ETF (VWO), and Morgan Stanley Emerging Markets Domestic fund (EDD) were not yet thought up. Swine flu may pose the first serious challenge to these recently listed ETFs’ growth prospects.
In particular, Latin America-focused ETFs such as iShares S&P Latin America 40 Index (ILF) and iShares MSCI Mexico (EWW) look like they may take the brunt of the selling over the next week. The Mexican peso will also feel selling pressure, which could set off a round of further complications. Indeed, in Mexico the virus is already taking an economic toll, as the domestic government has ordered the closure of bars, movie theatres and churches. Officials stopped short of closing down work places, however.