Swine Flu: Thoughts from an Epidemiologist

Naturally, when stories such as the current SWINE FLU! hit the newswires, a lot of misinformation is disseminated. Unfortunately, the 24/7 news establishment doesn’t help the situation. For some, it creates a sense of panic and for others, who tend to shrug off cable and network news’ sensationalism, a sense of apathy. Both, of course, are dangerous. I thought I would take this time to “clear the air” and ask an Epidemiologist contact from the Imperial College in London to explain to me her general thoughts and concerns on the outbreak and why we should not immediately write this off as another sensationalist story.

The Unknown

What makes this strain of influenza and this particular outbreak cause for concern is the unknown. Health officials, at this point, do not know how pathogenic this strain of the influenza virus is. In other words, there is little clarity around how serious the illness is, among the people who become infected. In the early stages of an epidemic, reported mortality rates (the number of deaths divided by the number of persons infected) are often inflated, because health officials only know about the most serious cases. As of this writing, Mexico has reported 149 deaths and approximately 1600 cases. My contact says that while this mortality rate seems high, it is hard to say whether this strain is extremely deadly, or whether health systems in Mexico and the United States are identifying those with the most serious infections. However, she does have concerns given that all of the deaths reported in Mexico are among otherwise healthy adults. Generally speaking, the majority of influenza-related deaths occur among those with compromised immune systems, such as cancer patients, those whose immune systems are undeveloped, such as young children, and those whose immune function has declined, such as the elderly. So, the fact that not a single death thus far has been among anyone under age three or over age 60 is a red flag.

Spread and Containment

While influenza viruses infect many animals, including but not limited to birds, pigs and horses, the probability of any particular strain to become pandemic depends greatly on its ability to be effectively transmitted between humans. Again, until health officials are able to gather more information on who may have been infected but only developed a mild illness, it is hard to say just how effectively this H1N1 strain is transmitted. However, there has been documented human-to-human transmission. With cases reported in Mexico, the USA, Canada, Scotland and Spain, the cat is out of the bag – this has the potential to spread quickly around the world. Containment is probably not a viable control measure.

In addition, this particular strain of H1N1 virus is a mixture of four different influenza strains (1 avian, 1 swine, 2 human), the combination of which has never been documented among humans. In other words, the entire human population can be considered susceptible to infection.

Quick Note on Tamilfu and Relenza

Laboratory data show that this form of influenza is susceptible to Tamiflu (oseltamivir) and Relenza (zanamivir). However, influenza viruses mutate quickly and it is possible that this virus could develop resistance to either or both of these antiviral medications, especially if the medications are overused or not used properly (i.e., not finishing the fully prescribed amount). A word of caution – antivirals are most effective when taken within 48 hours of exposure and are effective in reducing the seriousness of the infection. They don’t cure influenza.

Swine Flu’s Market Implications

We see this as a very volatile story and one that will likely spread in its impact on the global markets. As seen today, there are highly speculative plays in drug-makers, airlines, and consumer discretionary stocks and indices. Today saw major moves in airlines like FAA (Claymore/NYSE Airline Index Fund) down 10.5%, consumer stocks like CCL (down 13%), RCL (down 16%), and drug companies like GSK (up 7%). We see these trades as highly volatile and “chasing the news.” While shorting airlines or buying vaccination makers have some merit, we are cautious to jump into such pure speculation trades. These trades seem highly likely to overshoot as traders uses these stocks as the new fast money vehicles.

What does seem clear is Mexico’s (EWW-iShares MSCI Mexico Index Fund) instability and vulnerability to this crisis. As a country already “on the brink”, we see this situation as disastrous for Mexico. While the economic fallout will obviously depend on the virility of the Swine Flu, we see this as the potential “knock-out” punch to a Mexico’s growing list of problems. Using the SARS epidemic as a proxy, an estimated .8% was shaved off of China’s GDP in 2004. That was during a relatively healthy time for the global economy and a year in which China’s (FXI-iShares FTSE/Xinhua China 25) economy grew by almost 10%. In 2009, Mexico is suffering contagion from the global economic slowdown (the Mexican government previously estimated -2.8% GDP growth in 2009), a sharp decline in remittance payments, and a violent and destructive drug war. Early estimates have this outbreak costing Mexican companies $85 million a day in lost revenue, a figure likely to increase. The Mexican Central Bank will have its hands full defending the Peso (FXM- Currency Shares Mexican Peso Trust). There are early reports that Mexico will tap its $47 billion credit line from the IMF.

At ETFDesk believes the following funds will continue to have downside relating to this crisis;

FXM- Currency Shares Mexican Peso Trust

EWW- MSCI Mexico Index Fund

FAA – Claymore/NYSE Airline Index Fund

ILF- iShares S&P Latin American 40 Index

FXI-iShares FTSE/Xinhua China 25


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