The recent outbreak of avian flu in China has dampened investment sentiment towards Chinese equities. While not providing an investment recommendation in anticipation of a further spread of the disease, Credit Suisse examines lessons learnt from the deadly Severe Acute Respiratory Syndrome (SARS) epidemic in 2003, which infected 8,096 people and claimed 774 lives worldwide.

In its recent Research Weekly Asia report, titled “Avian flu: Lessons learned from SARS in 2003”, the private banking arm of Credit Suisse said the recent outbreak of avian flu in China has cooled the investment outlook for Chinese equities but it is too early to assess the pandemic potential of the current avian flu outbreak in the Mainland and its fundamental impact.

“The SARS crisis in 2003 shows us that market reactions to the pandemic were short-lived, while the fundamental impact was very market-focused and sector-specific. The SARS experience shows us that markets generally perceive emerging markets as more vulnerable to pandemic risks, due to their lower spending on healthcare and medical services,” the report said.

Since China and Hong Kong were at the epicenter of the SARS outbreak, the Hang Seng Index underperformed the global markets by 15 per cent during the crisis period, but sharply turned around to outperform the MSCI World in the post- SARS recovery period in the second half of 2003.

During the SARS outbreak, other Asian economies were temporarily hurt by the slowdown in tourist arrivals and retail spending, according to the bank.

Small Asian economies

“In particular, the small open economies of Hong Kong and Singapore witnessed the sharpest swings in growth outcomes. Singapore's economy contracted by 4.7 per cent quarter on quarter (saar basis) in Q2 2003, but staged a strong growth recovery in Q3 of 23.5 per cent. The recovery extended into 2004, with quarter on quarter growth averaging 11.5 per cent in the next two quarters,” the report said.

In Hong Kong, the economy contracted at a seasonally adjusted annual rate of 2.4 per cent quarter on quarter in Q2 2003, but similarly rebounded by 6.1 per cent in Q3. Property sales fell sharply, with prices falling to the lowest point in July 2003. Hong Kong's deflation cycle also bottomed at –4.0 per cent in July 2003, according to the report.

Sector specifc

Based on the SARS example, the sectors which are expected to underperform during a more severe and widespread avian flu outbreak are aviation, transportation, tourism and travel, while the consumer staples, energy and utilities sectors are expected to stay relatively resilient.

For example, during the SARS crisis, the shares of Asian airlines tumbled 25–43 per cent. During the 2009 swine flu episode, the share prices of Chinese airlines briefly dipped 15–20 per cent, followed by a sharp rebound within two weeks.

However, Credit Suisse said: “Don’t panic by selling Chinese and Hong Kong airlines.”

“In the absence of a widespread outbreak of the disease, we maintain our positive fundamental view on Chinese airlines. In our view, the market’s response to the risk of a pandemic has become more rational since the SARS outbreak,” it added.

It fact Credit Suisse reinforced its positive view by naming specific stocks including Cathay Pacific and Air China as potential out performers.

Investment tips

In terms of its current investment strategy, the bank recommends investors “short Japanese yen, mainly through the option market, and sell JPY on bouts of strength with our USD/JPY forecasts at 102 in 3 months and 105 in 12 months”.

In the emerging market bond category, Credit Suisse recommends buying Bank of Ceylon, “the largest commercial bank in Sri Lanka with good asset quality and a strong capital base”.