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 Feature Article
Bird-flu - deadly pandemic or mindless flap?
Background on bird flu [1] Avian influenza ('bird flu') refers to a large group of influenza viruses that primarily affect birds. On rare occasions, the viruses infect other species, including pigs and humans. Influenza pandemics are caused by new influenza viruses that adapt to humans and spread as easily as normal influenza, by coughing and sneezing. Because the virus is new, humans have no pre-existing immunity, so people usually become more seriously ill than if they had normal influenza. Influenza pandemics are rare but recurring events. Three pandemics occurred last century: 'Spanish influenza' in 1918 (40-50 million killed), 'Asian influenza' in 1957 (2 million killed) and 'Hong Kong influenza' in 1968 (1 million killed).
Health experts have been monitoring a new and severe influenza virus - the avian H5N1 strain - since it first infected humans in Hong Kong in 1997. From mid- 2003, this virus has caused the largest and most severe outbreaks in poultry on record. Since December 2003, over 120 human cases have been confirmed in four countries (Cambodia, Indonesia, Thailand and Vietnam). Around half of these have people died; most were previously healthy children and young adults. A pandemic can start when three conditions are met:
The H5N1 virus meets the first two conditions. The risk that the third will be met persists while opportunities for human infection occur, ie. while the virus circulates in birds. World Health Organisation (WHO) says control of the virus in poultry could take several years. Meanwhile, each additional human case gives the virus an opportunity to improve its human transmissibility. If a fully contagious virus emerges, its global spread is inevitable. The pandemics of last century circled the globe in six to nine months. Given international air travel today, the virus could reach all continents in under three months. Economic implications If a pandemic occurred, it would be a great human tragedy. The financial and economic impacts would also be significant. In a recent paper [2], Shane Oliver, Chief Economist of AMP Capital Investors, outlined three possible scenarios and the probable impact of each. Find an edited extract below.
What should investors do? Prudence, not panic, is the message. The avian H5N1 virus is spreading rapidly in birds. The human pandemic threat is serious, but not certain. We may "duck it", as Professor Peter Doherty said recently [3]. The scenarios above provide a good basis for assessing your situation. Would you cope if the more serious scenarios arose? There's no need to panic and sell, which would derail your investment objectives as effectively as any crisis. The main thing to consider is the risk level in your financial arrangements. Are you overstretched by mortgage, credit cards, loans? Have double-digit share returns caused your superannuation to become lopsided in favour of shares, perhaps inappropriately given your proximity to retirement? Are your investments concentrated in one or two areas? It's important to have a diverse spread of investments suited to your age and personal circumstances. Superannuation, in particular, is a multi-decade investment. Given its long timeframe, it can ride out a severe shock, provided you hold your nerve. If a pandemic arose, the more your super is exposed to sharemarkets, the more heavily it would fall in value in the short term, as would other investments and perhaps your home. Being able to withstand this (financially and emotionally) while meeting financial obligations and waiting for the post-shock recovery is the ideal situation in investment terms. Let's look at what happened when SARS struck. In hindsight, SARS was a relatively minor outbreak (approximately 8,000 people infected across 25 countries with 775 deaths). It didn't seem minor initially, though, and it still had a significant economic impact, reducing GDP in South-east Asia by 5 per cent.
Resources are a key driver of Australia's economy, with resource stocks particularly sensitive to economic growth. (Witness our current situation, with booming resources demand from China driving strong growth in Australia.) Early in 2003, when worries about SARS (and Iraq) dominated, the market was lacklustre and resource stocks were affected acutely, trailing the market. Around June, when markets realised SARS wasn't a major problem, resources recovered sharply, overtaking the general market. Many investors who panicked and sold early in the SARS crisis missed the sudden recovery, which was sharpest during July and August. If there's a pandemic, it could emerge in China. Given that China is a major growth engine in today's global economy, a sudden pause in that growth, dramatically reducing China's demand for resources, would have a substantial impact on Australia, even if the disease did not spread here. Apart from resources, another major risk for Australia is tourism. Even though Australia had only six cases of SARS, and no deaths, SARS caused an immediate impact on tourism here. Overseas travellers cancelled trips and there was a swift downturn in numbers through airports. Qantas cut many flights into Asia and its staff took leave. Fortunately, fear and panic subsided quickly once the outbreak was controlled. Regional economies rebounded strongly. This cautionary article does not only apply to bird flu. Prudent investors keep a watchful eye on all world events, ensuring their financial situation is not reliant on constant positive economic conditions. Shocks can, and do, occur. And it is the nature of such events that there is usually little warning. Russell LifePoints offers a completely different approach from 'do it yourself', allowing you to relax and delegate investment decisions to the Russell experts. It's a simple concept, but underneath lies a highly sophisticated investment vehicle giving you unrivalled access to some of the world's best investment managers and Russell's enviable investment reputation. Using Russell LifePoints will simplify your investment decision-making and, most importantly, automatically result in disciplined investment behaviour over time. Of course, you may need to reassess your choice if your circumstances change over time.
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According
to health authorities, the world is closer to an influenza pandemic than
at any time since 1968. We examine the risks for investors ...