MERS is the latest viral disease scare in the world. Although the focus of containment was in South Korea, the good connectivity of the world enhances the spread of virus to other countries. Prime Minister of Singapore, Lee Hsien Loong, said that it would be a matter of time that MERS virus would arrive in Singapore.
Singapore has a bad memory about SARS and most of us fear a repeat of that episode if MERS was to spread.
I received an email about a comment made by a research firm about what stocks to avoid if MERS becomes an epidemic. The study was referenced to Hong Kong, mentioning that Hang Seng Index (HSI) fell 7.8% from the end of Feb 2003 to April 25, 2003. It warned that investors should avoid airlines and hotels stocks, which had declined badly during SARS. On the flip side, investors were suggested to invest in stocks such as Hengan and Vinda which make sanitary products.
Let’s look back in history to see if the analyst was right.
All the resources you'll ever need as an investor
We've gone ahead and done the work. Compiled here are all the resources you'll need as an investor.
Could Other Reasons Caused the Decline in Hang Seng?
I went back in time to look at a multi-year chart to give me a bigger picture of the Hang Seng Index. The chart told me that the decline in Hang Seng had already happened a year before SARS hit.
The hypothesis of attributing the decline to SARS doesn’t seem to hold water anymore. There are likely to be other reasons. Could there be ripple effects from the Dot-Com Bust in 2000, or even the Sep 11 Attack in 2001? In such a complex world, it is no longer easy to link causes to effects.
Let’s zoom in and see how Hang Seng performed during the SARS period, from 4 Mar 03 to 23 Jun 03:
The finding was pretty counter-intuitive because Hang Seng Index actually went up during SARS! The report was correct that Apr was the lowest point in Hang Seng. But he did not complete the whole picture to say that Hang Seng began to go up in the middle of the SARS period.
This is a classic case of selection bias – intuitively we believe SARS or MERS will cause a decline in the stock market and we find data or information to support that belief – The analyst selected a specific time frame to match his assumption.
Did Hotel and Airline Stocks Did Worse During SARS Period?
The analyst was correct that the hotel and airline stocks were doing worse than other industries in general. However, it was not sufficient to attribute SARS as the ONLY cause. There could be a myriad factors that affect stock prices.
The proof comes from Cathay Pacific, which continues to under-perform the Hang Seng Index up till today. SARS wouldn’t have such a big and lasting effect. There were other reasons why the airline was performing badly. See chart below.
Did Sanitary Product Stocks Rise During SARS?
The sanitary product stock, Hengan, outperformed Hang Seng Index during SARS and beyond. Again, SARS would not be able to have a lasting effect on the sales of Hengan’s products. There would be other reasons to account for the sustained growth of the company!
Humans need answers and closures to things that have happened. We find it uncomfortable to not know the reasons. There are limits to our knowledge and information availability to identify the true causes to the things we have observed. For closure, we simply associate a plausible cause to the effect, even though it may not be the correct one.
Analysts and journalists are humans too and do fall prey to biases, and commit to loose linkages between cause and effect. Don’t read things and take the conclusions at face value, even if it is reported by supposedly trustworthy institutions or media. Investors need to develop a healthy dose of skepticism and also a sense of humility to know we may do loose attribution ourselves.
Could MERS affect the stock market? The answer is maybe, but we are sure MERS would not be the sole factor that moves market. At the same time investors and media are talking about Greece exit, Fed interest rate hike and China stock bubble.