Flu Outbreak
Scenarios and Trade Ideas for
Pandemic-Related Tail Risks
Markets appear to be looking past any significant risks. Despite the
many flu-related warnings, markets outside Mexico are treating the H1N1
virus as a non-event. We see limited risk that the virus grows into a deadly
pandemic posing significant downside to our global GDP and EPS estimates.
Regional estimates may face moderately greater risk (e.g., Mexico).
There is a tail risk, but we and experts agree that it would require an
unlikely change to the virus. In more dire scenarios, Mexico GDP could be
hurt to the tune of -1.5% to -3.5% and US GDP -0.5% to -2%. The impact
obviously would spill into equity markets: For instance, more extreme
downside scenarios could reduce S&P 500 EPS growth by 2-8% (pp. 2-10).
Derivatives View: Options may be a good way to play for
escalation. Volatility markets have not significantly repriced risk of a
pandemic since the outbreak, so we like buying put spreads on US
Consumer Discretionary sector to hedge downside risks (p. 5).
Equities - Industry Views: We review the US sectors and stocks most
exposed: Healthcare (p. 11), Transportation (p. 14), Restaurants (p. 20),
Media (p. 24), and Retail (p. 27). In Mexico, should effects from swine flu
extend for a prolonged period of time, we would expect Telecoms,
Financials, and Consumer Staples to outperform Airport operators,
Consumer Discretionary, Materials and Industrials.
Commodities View: Outbreak is negatively impacting lean hog prices, which
may ultimately curb supply in US hog market, setting up for an eventual
rebound. Demand for jet fuel is likely to take biggest hit among energy
producers in more severe scenarios (p. 30).
FX View: Most vulnerable are currencies highly exposed to trade, travel and
tourism (p.33).