With the WHO’s announcement that it has officially declared an H1N1 flu pandemic – the first global flu epidemic in 41 years – swine flu has Wall Street’s full attention once again. Disease fears had mostly faded from the mind of many investors, despite numerous warnings that we weren’t yet fully in the clear. While the WHO’s announcement is, on the whole, bad news for equity markets, I wrote yesterday that pharmaceutical and healthcare ETFs may stand to benefit from prolonged fears over an outbreak. As with most major developments, there’s another side to the coin. Here’s a look at four ETFs that could face downward pressure in the wake of the pandemic declaration:
- iPath Dow Jones UBS Livestock ETN (COW): Since the beginning of the swine flu scare, prices for lean hogs have been tumbling as worries over import bans and consumer reactions. COW, which is invested about 35% in lean hog futures and 35% in cattle futures, is down nearly 15% on the year, although it actually rallied in Thursday trading. If we find ourselves in the middle of a global outbreak, the “swine flu stigma” will likely drive prices even lower.
- PowerShares Dynamic Leisure & Entertainment (PEJ): If swine flu illnesses and fatalities find their way back into the daily headlines, anxiety will likely cause many consumers to avoid public places where disease is most likely to spread. For a fund that holds stocks of restaurants, cruise lines, and theme parks, such a scenario could have a material adverse impact.
- U.S. Commodity Funds Oil (USO): If the pandemic intensifies in high traffic destinations (such as the U.S. or Mexico), travel restrictions could be put in place, significantly reducing air traffic and demand for oil. Although such a scenario recently seemed unrealistic, it is now a very real possibility. With the summer vacation season approaching, the timing of the pandemic announcement couldn’t be worse for the travel industry.
- iShares Russell 3000 Fund (IVW): For those of you scratching your head at this one, allow me to explain. While Mexico is often thought of as the epicenter of the swine flu outbreak, recent figures from the WHO reveal that almost hald of the 27,000 reported cases originated in the U.S. Although well-equipped with resources with which to combat a potential outbreak, the U.S. economy is still reeling from the global recession. Becoming ground zero for a disease outbreak would be yet another obstacle to overcome, and would no doubt put a damper on U.S. equity markets over the summer months.
Time to Buy?
There’s an old saying that I’ve tried to keep in mind in this economic environment: crisis begets opportunity. While a few of the stocks mentioned above sunk on news of the WHO announcement, that doesn’t necessarily make them sells. In most environments, and particularly this current one, fear usually trumps optimism. When adverse news breaks, markets can often overreact on fears of a worst case scenario. A certain amount risk is baked into the share prices for each of the ETFs that could be negatively impacted by the swine flu. Despite the upgrade to the threat level, a full-blown global outbreak is still an unlikely scenario, as are prolonged travel restrictions or import bans. If the worst case swine flu scenario doesn’t play out, the risks baked into the market may prove to be overblown, and these ETFs may make a nice recovery.