Forget swine flu - here's what investors should really be worried about
John Stepek Apr 28, 2009
As you’d expect, fears over Mexican swine flu hammered airlines and other travel stocks yesterday, while pharmaceutical companies made solid gains. But overall, the wider market actually managed to end the day higher.
It’s not too surprising. Markets are in ‘rally’ mode – traders see the crisis, not as a genuine threat, but as an opportunity to make money from others over-reacting.
And hopefully they’re right. This is more serious than previous concerns over bird flu, as we seem to have an actual human-to-human outbreak. But so far, no one seems to be too worried about it.
What investors should really be worrying about is that the problems afflicting the global economy are going to take a lot longer to go away…
What should investors be worrying about?
Fears over swine flu saw British Airways (LON:BAY), Thomas Cook (LON:TCG), and Carnival Group (LON:CCL) all take a battering yesterday, while GlaxoSmithKline (LON:GSK) and AstraZeneca (LON:AZN) bounced. As I said yesterday, swine flu or no, I think the pharma majors look worth buying, and even after yesterday’s bounce, they’re still trading on decent yields.
As to how swine flu could affect the rest of the global economy – obviously it all depends on how bad it gets. But assuming this is no more serious than the 2003 Severe Acute Respiratory Syndrome (Sars) outbreak, for example, then the affected stocks should rebound pretty quickly once the fear starts to fade.
Of course, this time around the global economic backdrop is a lot nastier. But the point is, this is what investors should actually be worrying about. Several pundits are warning of the potential this outbreak has to destabilize an already fragile economy. But I suspect that if it turns out to be relatively benign, we’re more likely to get a relief rally than anything else, as traders use the excuse to turn more bullish.
But other economic data released yesterday demonstrated just how premature this optimism would be.
Green shoots in the housing market are squashed
Along with the travel sector, property companies were the other stocks feeling the pain yesterday. And for good reason. After a recent spurt of optimism in the housing market, we were served up a reminder of the grim reality.
The British Bankers Association said that mortgage approvals fell 7% between February and March, and were down more than 25% on this time last year. The figure was well below expectations.
Of course, signs of recovery were always tenuous at best. I was chatting to James Ferguson last night, who pointed out that anyone looking for green shoots in the property market right now is simply ignoring the lessons of past crashes. “Monthly mortgage approvals are still coming in well below the lowest point they reached in the last housing crash. That downturn lasted about six years from start to finish. And they think things are going to turn around faster this time?” You can read more on James’s views on property and the stock market in his Model Investor newsletter.
Rising bankruptcy is yet more bad news for property
Meanwhile, the number of British companies with “critical problems” rose by 59% in the first quarter of this year, compared to last year, according to bankruptcy specialist Begbies Traynor. As James Hall reports in The Telegraph, the worst-hit sector was property, with the number of companies in trouble more than doubling over the past year. Builders and financial services were close behind, with retailers also making up a significant chunk of the casualty list.
More companies hitting the wall adds up to higher unemployment, which in turn means more problems paying mortgages and fewer people either able or willing to apply for new mortgages. As Seems Shah at Capital Economics puts it: “There are simply too many downward pressures on the housing market to expect it to make a steady and significant recovery yet… there is still a long way to go before we can expect house prices to stop falling.”
And it’s the same in the US. As US fund manager John Hussman of Hussman Funds puts it, “a near-term economic recovery [in the US] would require a major and immediate resumption of the housing boom.” But this isn’t going to happen. “Put bluntly, the economy is not improving, and it is not likely to improve within a few months, because we have far more defaults, foreclosures, and credit excesses to work through.”
The economic pain to come means we can expect further falls in the stock market. “We are likely to see a very wide and extended trading range, more deep selloffs, more short squeezes, and eventually disillusionment and revulsion from investors.”
This last refers to the point where investors are so sick of being disappointed by stocks that they swear off equities forever. And that’s usually when things start to rally for real, because there are no sellers left. And the calm reaction to the swine flu outbreak so far, suggests we’re a long way off from this point.
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