Investors are not factoring bird flu risk into portfolios
February 23, 2006
By Jeremy Gaunt
London - Spreading bird flu is presenting the world's investors and financial markets with just the kind of risk that is hardest to deal with: the unknown.
Familiar geopolitical or economic risks can be priced into assets. Even a major war can sometimes be planned for. But bird flu is a nebulous peril.
"We just don't know how it is going to pan out," says John Ip, a senior economist with Morley Fund Management in London.
Despite the recent resurgence of avian influenza and a spread into Western industrialised countries - Group of Seven members France, Germany and Italy have reported outbreaks this month - financial markets have paid scant attention.
They remain driven by factors such as rising US interest rates, mergers and acquisitions, and spikes in the oil price.
One reason is that bird flu has not yet wrought much damage, at least in relative terms.
The number of human dead from the H5N1 strain is only 92 globally since 2003 and many of the outbreaks among birds have involved wild species such as swans. There has also been limited economic impact beyond localised costs.
More trenchant is the fact that while there have been limited bird-to-human infections, the virus has not mutated into a human-to-human variety.
That possibility has been the big worry, prompting the World Health Organisation and others, including investment banks, to warn that bird flu could suddenly become a catastrophic pandemic with horrendous human and economic costs.
But whether it happens and to what degree remains pure conjecture. Beyond a few strategically based bets on pharmaceutical companies, investors are generally unmoved.
"At the current level, it just is not an issue," says Michala Marcussen, the head of strategy and economic research at Société Générale Asset Management.
Investors know how to deal with various kinds of risk.
To borrow loosely from US defence secretary Donald Rumsfeld, take what might be called a known known, something investors know will happen and generally know what to expect from it.
The US-led invasion of Iraq in 2003 was a case in point. Uncertainty on financial markets was limited to when it would happen and whether there would be any upsets.
Investors cut back on risky assets such as stocks and piled into havens as the start of war seemed to near.
They then flooded back into risk when it was clear that the war was at least going as they had assumed it would.
Now take what might be called a known unknown, an event that investors clearly know about but with an unknown outcome.
In those circumstances, they put a premium on assets likely to be affected, such as the $1.50 (R9) a barrel that went on to oil this week as militant violence increased in Nigeria. Such premiums probably remain until a clearer picture emerges.
Bird flu might be presented as an unknown unknown. In terms of it being a major event, investors don't know if it will happen and don't know to what degree it will affect them if it does.
"That's a massive wild card," says Youssef Affany, the head of investment counselling in Europe for Citigroup Private Bank. "There are very few things you can do directly."
As a result, investors have done little to nothing to prepare their portfolios for a bird flu pandemic.
Affany says they appear to be relying on governmental health and safety procedures to keep the virus at bay, looking at the containment of previous outbreaks and other health threats such as foot and mouth disease. "It is perhaps easier," Affany says.
Giorgio Radaelli, the chief strategist at wealth manager BSI in Lugano, Switzerland, goes further, suggesting that investors would look away from the problem until the last minute. "Markets in this kind of scenario are going to be very complacent."
The view among many investors is that bird flu is going to have to become a much more concrete risk before they start reacting. This suggests that markets may be setting themselves up for sharp moves if, say, there is a human-to-human case.
And, of course, if the worst case scenarios of a deadly pandemic - killing millions, destroying trade, unhinging economies - came to pass, there would be a lot of other issues.
As one strategist says privately, portfolio management would not be the only thing on his mind. - Reuters
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