Financial Effects of a Pandemic

Recently, there has been more talk of the Avian Flu possibly becoming the next Pandemic. The experts say that it is not a matter of “if” but “when” we will have the next pandemic. There is history of every few years and major pandemic arises in the world. In each case, most issues remain the same. In this excerpt, I will discuss some of the effects on investors.

Tourism and hospitality industries would suffer an enormous blow – the same for airlines and most other transportation sectors. This means reduced demand for oil and gasoline. Large gatherings of people – including concerts, play, movies, conference and sporting events – would be cancelled. The retail sector would be hit as most discretionary spending and trips to shopping centres would be dramatically curtailed. Other front-line casualties would include the leisure sector, gaming, racetracks and theme parks. Life insurers and re-insurers could throw their actuarial tables out the window.

To the extent that a disproportionate share of 20-40 year olds would die, housing markets would weaken in response to excess supply, and all related building, real estate, decorating, and furnishing companies would suffer. Property values would fall, and some would be had later at bargain basement prices.

Banks and other lenders would see a marked decline in mortgage and consumer lending. Commercial and corporate lending activity would likely slow at first as well. Loan losses could well increase sharply as households lose income earners and businesses in many sectors are hit badly. Banks would continue their essential business and trading operations, increasing the demand for remote access and online banking. Investment banks, financial planners, mutual fund companies and other institutional, corporate or private-client money mangers would be under enormous pressure to minimize risks and wait out the pandemic as best as possible. Clearly, at the end of the crisis, there would be many bargains to be had, but only those in strong financial positions going into the disaster would be in a position to invest in under priced real and financial assets.

Given that household debt-to-income levels are at record highs in the U.S. and Canada, active savings out of income are the lowest in history, and exposure to real estate has never been higher, many families are in a financially precarious position. As Alan Greenspan says, given all of the risk out there, reducing debt and spending relative to income is prudent. Investing in blue-chip income-producing companies is judicious as well. Adding to precautionary savings and avoiding, as much as possible, the forced sale of assets at markedly depressed prices should be a goal.

The poultry industry would be another victim of pandemic, already hit hard in Asia as hundreds of millions of birds have been culled – in the event of a full-fledged crisis, consumption of poultry and eggs would plummet. That hurts companies such as YUM brands, owner of KFC, not to mentions businesses such as Perdue Farms, ConAgra, Tyson, Foster Farm, Maple Leaf and related agribusinesses and feed and grain businesses.

Some sectors could benefit in terms of revenue growth and profitability, as well as changing patterns of consumer and business behaviour. Telecommunications and tech businesses that cater to telecommuting could see enhanced demand for their products and services. Large and small businesses would likely boost their virtual private networks and increase use of videoconferencing. Pharmaceutical companies and other businesses at the forefront of pandemic control and response would also benefit.

In conclusion, the full effect of pandemic on inflation and deflation, and commensurate move in interest rates, gold prices, currencies and stock prices would depend on the length and severity of the pandemic. This would not be the end of the world. Most likely, 95-99% of the population would survive. For investment portfolios, this time around, it will not be necessary to rely on luck to protect the value of one’s portfolio. Cash, put options on volatile stocks, high quality bonds, and high quality dividend paying stocks of companies with minimal exposure to the risks will be the best survival packs. They will provide the survivors of the pandemic with the capital to take advantage of the wide array of cheap assets that will – however temporarily – be available after the virus joins its predecessors in whatever resting places the world has on offer.