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Wall Street lays plans in case bird flu strikes

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    Posted: March 23 2006 at 6:27am
Wall Street lays plans in case bird flu strikes
 
By Adam Shell, USA TODAY
 
NEW YORK Bird flu has yet to come even close to the USA's borders, but Wall Street analysts are already crafting advice on how investors can inoculate their portfolios if a pandemic breaks out.
 
Not since the SARS scare in Asia in spring 2003 when Hong Kong stocks plunged 10% in six weeks before rebounding after the virus stopped spreading has a health-related crisis put investors on edge.

Wall Street, which makes its living betting on what the future may look like, has been busy concocting what-if scenarios, handicapping winning and losing stock sectors, and educating clients in the science of bird flu. Recent ink devoted to the H5N1 virus:

Special report. Citigroup recently sent clients a comprehensive 46-page report on bird flu that includes a brief history of the virus, risk factors and stock picks. The report was compiled by stock strategists, economists, government policy experts, epidemiologists and currency analysts from Europe, Japan, Australia and the USA.

Stocks to watch. TrendMacro, an investment strategy firm that caters to big institutional investors, created an Avian Flu Index in October that now consists of 17 health care stocks that develop vaccines, anti-virals and other products likely to be in great demand if the avian flu scare morphs from a mere threat to deadly killer.

First of a series. David Kotok, chief investment officer at Cumberland Advisors, on Friday released the first in a series of reports that will focus on the financial risks and psychological impact on investors.

"We thought it was important to get ahead of the curve on something that's going to become of increasing concern to the capital markets as the disease spreads," says Paul Heldman, senior health policy analyst at Citigroup.

Birds could reach USA in months

Avian flu primarily affects poultry but on rare occasions can infect humans, says the World Health Organization. More than 100 people have died from the virus since 2003, WHO says.

Earlier this week, U.S. government officials said migrating birds infected with avian flu may reach the USA within months. The virus has already spread across Europe, Asia and Africa.

The fear is that H5N1 will adapt into a strain that can be transmitted from human to human. If a fully contagious virus emerges, its global spread is considered inevitable because people will lack immunity to the virus, WHO says. Given inadequate supplies of medicines to fight the virus, large numbers of deaths could occur. So could massive economic and social disruptions.

On the list

That's why Wall Street has added bird flu to its list of market negatives that include terrorism, protectionism, rising interest rates and Iran's nuclear ambitions.

"Why should investors care about the risk of a pandemic? Because the risk of a planetwide outbreak is very real. It's happened before," says Donald Luskin, chief investment officer at TrendMacro.

The 20th century had three influenza pandemics:

The Spanish Flu in 1918 killed an estimated 50 million people, WHO says. The Dow Jones industrial average suffered a maximum loss of 11.1% in the peak death period, according to data compiled by Ned Davis Research (NDR).

The Asian Flu in 1957 and the Hong Kong Flu in 1968 resulted in estimated deaths of 2 million and 1 million, respectively, says WHO. The Dow fell almost 14% in 1957 and nearly 9% in 1968, NDR says.

The scenarios

How stocks do this time depends on what plays out:

Best-case scenario. Markets will cheer if the virus never becomes transmissible from human to human. In that case, Luskin says, investors can make money investing in companies that make vaccines and testing therapies.

Examples, he says, include Gilead Sciences, the inventor of the anti-viral drug Tamiflu, which is being stockpiled by governments around the globe; Hemispherx Biopharma, which is seeking final approval for its anti-viral drug Ampligen; and Sinovac Biotech, a Chinese vaccine maker.

SARS-like scenario. A mild pandemic that is contained could add up to a buying opportunity, says Citigroup's Heldman. Many of the stocks likely to decline from flu-related panic selling, such as airlines (Continental), hotels (Hilton) and shopping malls (Simon Property) would likely enjoy rebounds.

Worst-case scenario. That's if a full pandemic hits, the economy shuts down, people die. Airlines, hotels and other businesses that involve travel or crowds will fall sharply. Citigroup says shares of drug companies, vaccine makers, and hospital and health care stocks (Tenet, Community Hospitals) will rise. Home entertainment providers, such as Blockbuster, should fare well. So, too, could safe investments such as Treasury bonds and cash.

But, "The losers will come under severe pressure," says Heldman. Adds Luskin: "It will be like Hurricane Katrina on a global scale."

Woody Dorsey, behavioral market strategist at Market Semiotics, says the fact that the virus can spread quickly and cause widespread havoc means it is likely to be more damaging to the economy and financial markets than a terrorist attack or severe hurricane.

"We're moving into a 'bio-era' where computer viruses, physical viruses and fear move around the world quickly," he says. "It's the downside of globalization."

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