The H1N1 crisis and your portfolio

In 2003, when Asia was hit by SARS, fear-stricken Asian markets fell consecutively for months, easing up only when the World Health Organisation lifted its advisory against travelling to SARS-affected countries. Shares of hospitality industry-related companies and airlines bore the brunt of panic-selling as punters expected they would be hardest hit by the epidemic.

With the onset of the H1N1 crisis, will we see a repeat of the SARS situation. Will this be an uncontrollable outbreak that brings ‘hope’s of economic recovery spiraling to the bottom?
Approximately 2 months since the seriousness of H1N1 was made known to the public, news of more infections continue to be reported. Every day seems to bring an exponential increase in the number of infections and a steadily-creeping death rate. Indeed, fear continues to seize investors. But, are there grounds for such fears? Let’s take the time machine back to two significant moments in our market history and see if we can learn any lessons from them.

With SARS, close to 8000 lives were affected and 800 died from it. In April 2003, with no warnings given, MSCI Asia rallied by close to 30% in the following four months.
The September 11 attack in 2001 caused the US Dow Jones to suffer a historic one-day drop of 680 points from its peak of 11,000 points, or an equivalent of 7.1%. By the end of that week, the Dow had fallen 1,369.70 points, or 14.3%. A recovery attempt allowed the index to close above the 10,000 level for the year.

Drawing references from history alone may not portray the current recession accurately, for it is true that the fundamentals of the economies today, especially that of the United States, are a lot weaker compared to the past. But one point remains relevant - whenever there is prominent negative news, the media will exaggerate its impact by many folds. To give you more perspective, the total number of people in the Western Pacific region infected by dengue in 2008 is around 210,000, with 671 reported dead. Add the numbers from Asia, where humidity and heat make dengue more rife, and you will have an idea of how much larger the number we are looking at really is. However, very Interestingly, dengue has never caused much panic or excitement in the stock market.

But of course, as the media toys with the sentiment of traders, we ought to harness the volatility that results from it. As Warren Buffet once said, if there is no volatility in the stocks market, he would rather be a beggar on Wall Street! JNP subscribes strongly to his point when it comes to our investment philosophy: positioning your investment portfolio strategically to reap long term gains over inflation, as well as riding through the current market noises to make your portfolio a stable, or even a profitable one. With that, let us examine if the gloom of the H1N1 crisis, coupled with a staggering economy can provide us with gems of investment opportunities.

Casually browse through the Internet or turn to the business section of the newspapers and you should, by now, realise that healthcare sector is an extremely hot topic. As early as two months ago when H1N1 first made the headlines, our advisers were strongly encouraged to help their clients buy into the healthcare sector. We had no idea at that moment how widespread the infections would turn out to be, but we issued that advisory for two strategic reasons. Firstly, should the situation worsen, the media would predictably exaggerate it, dragging down world markets and prolonging the downturn. Because of this, we believed that prudently and astutely-chosen healthcare sector-related stocks would help cushion the impact on our clients’ portfolios. Secondly, even if the then-called “Swine Flu” episode quickly subsided, healthcare would remain a globally-critical sector, especially for a worldwide ageing population.

Having said so, we should be cautious not to take gambles on obscure biotechnology firms whose products’ success in clinical trials remain unknown. For example, in 2001, shares of a small company called Vital Living Products surged more than 1,500% from mid-September to late October as traders bet that the company, which rushed to develop a home water testing kit for anthrax following 9/11, would soon be selling the kits nationwide in the US. That didn't happen. A month later, Vital Living stopped marketing the kits after the FBI raided its offices and the company was delisted in 2002.

Looking at the massive financial stimulus that US government is injecting into its flagging economy, JNP strongly believes that even if the recession does not completely bottom out soon, the US economy will, at best, recover with the aid of a permanent life-support system. As the US remains the world’s predominant economy and trading entity, it will call for more prudence when evaluating your investment portfolio. But there is definitely no reason to expect doom and gloom. For when it comes to investing, do remember a simple fact. Stock markets are created by humans, whose actions are largely dictated by emotions. No sane person would deliberately cause the stock market to fall into a black hole, for that is simply mutually-assured destruction.

In that light, the market be said to have a wisdom of its own, with its ability to rally ahead in spite of the bad news and dismal numbers on paper. That is the intrinsic nature of the market and it will remain that way as long as the global financial system, as we know it, survives. So, as an investor, continue to wear a hopeful hat when you step out into the market, and hold tightly to the hands of your adviser who will walk you through the ups and downs of this exciting, but definitely rewarding investing journey.