Column

BEWARE OF THE BEARS

Despite SARS and Iraq, this is a good time to invest in the global economy

DONALD COXE April 21 2003
Column

BEWARE OF THE BEARS

Despite SARS and Iraq, this is a good time to invest in the global economy

DONALD COXE April 21 2003

BEWARE OF THE BEARS

Column

DONALD COXE

Despite SARS and Iraq, this is a good time to invest in the global economy

IT MAY SEEM to be a good time for bears. The stars—and SARS—seem aligned for grim news.

For apocalyptically inclined bears, the news could hardly be more satisfying. Three of the Four Horsemen (War, Death and Pestilence) are now rampant, and global weather patterns have been so erratic that Famine could be on the way. When deaths in Toronto from SARS are reported to be in the range of combat deaths of U.S. troops on a bad day in Iraq, it’s a bonanza for bears. (Come to think of it, why trust epidemiologists when they’re so bad at naming plagues? In the old days, the English gave pandemics splendid names like Black Death, or for syphilis The French Disease. Now, we get a redundantly monikered severe acute respiratory syndrome from the people who gave a hideous plague the seemingly reassuring name of AIDS.)

The outbreak of SARS has apocalyptic resonance for the airline and travel industries. Since 9/11, these major employers have been suffering. Things got a bit better during the winter, then came the really bad news. You can catch a possibly fatal disease in a plane or a hotel room; that Asian man coughing near you may have come from Guangdong province, where the only figures on the death toll come from a government determined to understate them.

There is never a good time for a new plague, but this one comes as the global economy emerges from recession. That downturn was the punishment inflicted by the crash of technology and telecom stocks. Most economists had been optimistic that this would be the year when U.S. capital spending would kick in and the economy could be gradually taken off its life support of near record-low interest rates—including, most conspicuously, zero charges on automobiles. In recent months, even that giveaway was losing its lustre, and Detroit has been getting desperate about finding other inducements to move cars.

Which brings us to SARS.

To date, the serious impact on the U.S. economy of SARS has been restricted to cancellation of Americans’ travel plans to China, Hong Kong and Toronto, which means more bad news for bankrupt United Airlines and struggling Northwest. Restaurants in Chinatowns in New York and San Francisco report steep drops in diners. To date, no Americans have died of SARS, a combination of good luck and the national fixation on homeland security. The nation’s elaborate plans to identify and combat bioterrorism have meant heightened awareness and rapid response when SARS victims show up. (A Virginia hospital which had treated an anthrax victim turned up the first U.S. SARS case.)

Canadians don’t need to be told that SARS can have an economic impact. Cancellation of a 12,000-attendee cancer convention in Toronto is the first sign that epidemics produce collateral damage. Although one can expect that the disease will shortly be contained in Canada, the bad publicitywill doubtless offer excuses for U.S. event planners to move venues from the region whose most-publicized politician south of the border is Carolyn Parrish. (“Come to friendly Toronto, where you’re safe,” doesn’t look like a credible sales pitch to Americans these days.)

Canada is the only big industrial nation with a seemingly serious SARS problem at the moment, although that could change swiftly. What scares global economists is the possible sand in the works of the engine of global growth—East Asia. Stephen Roach, the bearish Morgan Stanley economist, revised his already low forecast for

A new disease at a time of a new kind of war and new kind of economic downturn is bound to get overhyped in the media

global growth to recession, blaming SARS. (Like most other economists, he thinks the Iraq war will have only temporarily negative effects. That war has gone better than most forecasters assumed, but its aftermath looks problematic. Protecting the oil wells and preventing a widening of the war were, from an economic standpoint, major accomplishments.)

Mr. Roach somewhat tastelessly refers to SARS as “another nail in the coffin for the world economy.” What are his chances of being right? The effects on Hong Kong are severe. Tourism has collapsed, and even residents are avoiding restaurants and bars. The outbreak began on the ninth floor of the Metropole Hotel (said by rumour mongers to be in Room 911) and spread through the city. Multinational firms quickly issued travel bans to their employees and then began suggesting that their executives posted to Hong Kong send family members back home. It will take a long time for confidence to return, if only because of the porosity of the border with China.

China’s economy is certainly less touristdependent than Hong Kong’s (or Toronto’s). But the regime’s foot-dragging response raises legitimate worries that the disease that experts believe was born in Guangdong may be better established than government data suggest. (A thousand sick Chinese? That’s like the odds of winning a lottery. Why worry?)

So what should investors do?

A contrarian would argue that a new disease coming at a time of a new kind of war and a new kind of global economic downturn is bound to get overhyped in the media. Mortality is low. This isn’t the 1918 flu redux which, some experts speculate, also originated in China but took time to spread worldwide. This one is airplane-spread, so it developed global reach rapidly. However, that doesn’t mean it will kill millions.

Last month, bears warned the Iraq war would be a disaster triggering $US50-abarrel oil. Now, they tell us SARS is the virus to sicken the global economy. Baron Nathan Rothschild said during the Napoleonic Wars that you invest when there’s blood in the streets. I am inclined to the view that one might profitably update the advice to substitute masks in the formula. Hfl

Donald Coxe is chairman of Harris Investment Management in Chicago and of Toronto-based Jones Heward Investments. dcoxe@macleans.ca