An Ounce of Prevention…or a Pound of Flesh?

Wednesday, 5 February 2020
Adelaide, Australia
By Bernd Struben

  • The losers
  • The potential winners
  • What our editors are saying

You’ve likely heard the old saying, ‘An ounce of prevention is worth a pound of cure.

We owe the oft-quoted Benjamin Franklin for that one.

While this wisdom largely rings true it depends, of course, on the nature of the preventive ounce.

And history is rich with dubious preventions.

Take bloodletting, for example.

For thousands of years medical practitioners drained blood from patients to treat ailments ranging from headaches to gut pains to the common cold. Some used leeches. Others simply cut open a vein. Placebo effect aside, few if any of these patients would have received their ‘pound of cure’. While the less fortunate would have bled to death.

Then there’s this appetising treatment, from history.com:

Egyptian physicians used human and animal excrement as a cure-all remedy for diseases and injuries. According to 1500 B.C.’s Ebers Papyrus, donkey, dog, gazelle and fly dung were all celebrated for their healing properties…’

Erm…I’m feeling much better now. No need to bring in your donkey, thanks.

And here’s one of my favourites.

When London was hit by an outbreak of the plague in 1665, authorities instructed children to smoke cigarettes. Yep. They figured the disinfectant nature of tobacco would help fight off the disease.

You could see the folks at Philip Morris International getting on board with this one.

Returning to the present, you can’t help but wonder if the preventative measures underway to contain the coronavirus will deliver on their pound of cure.

The US, Australia and New Zealand have all closed their border to non-nationals who’ve so much as stepped foot in China over the past two weeks. Hong Kong, the EU and other nations are stepping up their own border controls and closures. And the free market is reacting, with airlines across the world choosing to cut flights in and out of China.

Within mainland China, the prevention efforts are even tougher. China now holds the dubious honour of implementing the biggest quarantine in history. Some 45 million people are in virtual lockdown in the city of Wuhan and the surrounding province of Hubei.

The economic impacts here are obviously massive. The true extent of the damage to global growth remains to be seen. And it’s still unclear if these efforts will deliver a pound of cure…or take a pound of flesh.

That’s not to trivialise the potential threat of this virus. Nor those who have already died from it.

The most recent updates indicate over 490 people have now died in China. With two more deaths outside the country.

Globally there are more than 20,000 confirmed cases. The real number is likely significantly higher. And while there are ‘only’ 490 confirmed deaths so far, there are also less than 700 confirmed recoveries.

That leaves a heck of a lot of uncertainty hanging over the next few weeks.

Uncertainty that markets have shrugged off for a second day running.

We’ll look at some losers and potential winners, after the markets…

Markets

Overnight, the Dow Jones Industrial Average closed up 407.82 points, or 1.44%.

The S&P 500 closed up 48.67 points, or 1.50%.

In Europe the Euro Stoxx 50 index closed up 71.01 points, or 1.94%. Meanwhile, the FTSE 100 gained 1.55%, and Germany’s DAX closed up 236.55 points, or 1.81%.

In Asian markets Japan’s Nikkei 225 is up 293.12 points, or 1.27%. China’s CSI 300 is up 1.66%.

The S&P/ASX 200 is up 27.60 points, or 0.40%.

West Texas Intermediate crude oil slipped below the US$50 level for the first time since December 2018. Though futures indicate it’s likely to bump up from here. WTI is US$49.67 per barrel. Brent crude is US$53.96 per barrel.

Turning to gold, the yellow metal is trading for US$1,554.02 (AU$2,308.75) per troy ounce. Silver is US$17.61 (AU$26.16) per troy ounce.

One bitcoin is worth US$9.161.38.

The Aussie dollar is worth 67.31 US cents.

The losers

While the broader market has put in a solid two-day rally, not all stocks have enjoyed the ride higher. Many remain vulnerable to the unknown fallout from both the coronavirus virus and the prevention methods employed to contain it.

With the price of iron ore down significantly, the big miners like BHP and Fortescue are facing mounting headwinds.

Oil and copper have sold off too.

As Crisis & Opportunity’s Greg Canavan notes, ‘The price has plunged in recent weeks. Clearly, copper is telling you that the short-term effect of the virus on China’s economy is potentially significant.’

Australia’s tourism and education industries also rely heavily on Chinese customers and students. Not to mention our casinos. If the current travel ban remains in place, you can expect some serious losses to materialise across these sectors.

‘So what about wine?’ my viticulturist friends asked over a glass of Barossa Chardonnay.

In answer to that, here’s the latest from chief executive of Wine Australia, Andreas Clark (as quoted by the AFR):

Looking ahead into 2020, we anticipate that coronavirus will have an impact on sales, particularly to China, but at this stage it is difficult to predict the degree of that impact.’

That doesn’t exactly clarify matters. But with sales to China making up 44% of the $2.9 billion in Aussie wine exports last year even a small pullback is going to hurt.

The potential winners

With the death toll from the virus ballooning, looking for stocks that could benefit may seem callous. But in this case, the stocks in question would be part of the solution.

Here in Australia, CSL Limited has thrown its considerable weight into helping find a vaccine. As the SMH reports, yesterday CSL announced, ‘it was considering an involvement in the fight against coronavirus saying it is “currently very engaged with various institutions to assess possible strategies and options”.

Year-to-date CSL’s share price is up 14.8%. If it succeeds with a vaccine the share price would likely run far higher. If it fails, the stock will likely suffer. Though CSL, with a market cap of $143 billion, isn’t as risky as play here as some of the smaller biotech stocks having a go at a cure.

NASDAQ listed Inovio Pharmaceuticals Inc, for example, has a market cap of only US$371 million. And it’s one of two listed companies the Coalition for Epidemic Preparedness Innovations (CEPI) has agreed to fund in search of a cure. Its share price is up 15.6% so far in 2020.

US$7 billion Moderna Inc, also listed on the NASDAQ, is the second company CEPI is helping fund. The stock’s gained 8.5% year-to-date.

The US$85 billion NASDAQ listed Gilead Sciences has also joined in the race for a cure. As has the US$256 billion vaccine giant, GlaxoSmithKline Pharmaceuticals.

The list goes on…

We can only hope one…or more…of these companies succeeds with a vaccine or cure in short order. If so, their shareholders should be amply rewarded. While the share prices of other biotech stocks — inflated by hopes they would be the first to produce results — could fall steeply.

To date, we know of only one clear winner from the outbreak. New Zealand’s lobsters.

From The Australian:

Some of the tonnes of live rock lobsters stranded in New Zealand after Chinese customers cancelled orders will be returned to the wild, the fisheries minister said.

The New Zealand government estimates up to 180 tonnes of the spiny creatures are being held in pots and tanks at sea and on land...’

Go. Be free!

What our editors are saying

Aside from the biotech stocks already on their buy lists, our editors and analysts aren’t gambling their subscribers money trying to guess which company may come up with a vaccine first.

Here’s Murray Dawes, editor of Alpha Wave Trader:

My guess is the situation is worse than they are letting on. But as far as our trading goes, I am sticking with our initial entry points in both stocks that I sent buy alerts in last week. Also, I’m not dumping any of our positions in a panic.

If anything, I will be scouring the market for buying opportunities if the panic gets out of control over the next few weeks.

It is never fun considering such things in the face of bad news, but we must continue to make good decisions regardless of what is going on in the world.’

Murray adds this note of caution, ‘I am wary of the next few weeks, so there aren’t many stocks that I am willing to jump into straight away.

Over at Australian Small-Cap Investigator, editor Sam Volkering and analyst Ryan Clarkson-Ledward aren’t letting media headlines distract them from what they see as a far more important development for Aussie investors.

In case you missed it, Brexit is done and dusted.

It was always what came after Brexit, which interested us. Mainly due to the fact that we want to see what the UK will do with its reclaimed independence. Particularly, when it comes to trade.

Currently, it seems as though we’ll see a flurry of trade deals done before the year is out. And one of the nations at the top of the list is Australia.

This trade deal is going to be a big theme for 2020, and we plan to make the most of it.

That’s all the time we have for today. Be sure to check back in with us tomorrow.

Cheers,
Bernd