How Pandemics Have Impacted Airline Stocks, From SARS To Coronavirus
No one wants to be holding travel stocks during global health crises. They are the opposite of holding health care and pharmaceuticals at a time when fear drives market sentiment.
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China’s stock market is supposed to open on Monday. It’s likely to go down, barring a massive pumping of money into the system by the People’s Bank of China. While no is expecting a bloodbath that will trigger an emergency stop in trading, some stocks will do way worse than others. They will all be related to travel.
Financial asset returns are highly influenced by media and public sentiment. Financial data and analytics firm, Refinitiv, has this thing called the MarketPsych Index (RMI) — a global index examining media driven sentiment data along a time series for roughly 15,000 global assets going back to 1998.
Data derived from global news and social media are condensed into Refinitiv indexes. Their indexes cover over 40 countries, including China, of course, which has seen two of the biggest global public health scares in the 2000s — SARS and now the novel coronavirus, a new pathogen scientists are still reviewing to discover its origins.
Using data from Refinitiv on their Human Infectious Disease Outbreaks; Fear Indicators; and Market Sentiment indexes during those times, here is a history of how some of the biggest airlines in China and the U.S. were impacted by the outbreak and over what period of time did investors hit the panic before, before they started buying again.
Cathay Pacific Airlines & SARS
Right now, Cathay Pacific is down nearly 14% in the last four weeks. It’s underperforming the Hang Seng and the MSCI China indexes.
During the SARS outbreak, the stock fell by more than 20% in March-May 2003 before recovering fully from that loss two months later.
In November 2002, the SARS outbreak begins in China’s Guangdong province, which borders Hong Kong.
It wasn’t until February 10, 2003, that China notified the World Health Organization (WHO). At this point, the Refinitiv MarketPscyh Index (RMI) capture some sparse but still small impact of the outbreak in their media tracking. “Interestingly, sentiment starts to consistently fall and on the 22nd of February, SARS arrived in Hong Kong and we see quite a drop in sentiment,” says Tiago Q. Teodoro, a researcher for Refinitiv. Fear indicators rose for six weeks, but Cathay Pacific didn’t react until mid March when SARS started being discovered in Thailand, Vietnam and Singapore. The U.S. Center for Disease Control and Prevention (CDC) issued a travel ban to all countries with SARS.
Two days later, on March 17, 2003, Cathay stock drops 4%. The stock recovers during the week, but panic is still on the rise. And so within a week, the stock falls again by just under 2% and continues downwards for a nearly 30% decline in the next couple of weeks until the end of March.
From then on, SARS will be routinely in the news. News on SARS starts falling by May. However, by mid-April investors have already called a bottom and Cathay stock starts to recover.
When the RMI is most active, stocks are getting crushed.
U.S. Airlines & Swine Flu
United, Delta and American Airlines shares all settled lower on Friday. Over the last month, United is down 16.6%, Delta is down 5.6% and American is down 7.7%.
All three have more downside to come.
The 2009 swine flu pandemic came out of Vera Cruz, Mexico. It started somewhere in March 2009.
March 28th saw the first case reported in the U.S. For financial news, the epidemic was a non-story until the middle of April. And on April 24th, the WHO issued its first Disease Outbreak Notice, confirming that the infection has reached a number of people in Mexico and in the US. Until that point, the RMI is hovering around 0.10% on a scale of 0% to 1%. So it’s not all that scary.
But when the WHO issues its notice, it jumped to 0.18%. The higher the number, the worse it is going to be for American Airlines and the like.
In Mexico, Refinitiv’s index goes through the roof, crashing over 1%. Continental shares fell 1.7% for the day, the worst performer. United settled 0.5% because the Refinitiv fear portion of the MarketPsych index wasn’t high enough yet.
By April 26th, news about swine flu became more common place. Fear rose, sentiment sunk. And so on the next day, April 27th, all the three stocks collapsed.
The fear indexes topped out two days later. Airline stocks started a two weeks recovery. Once the swine flu concerns dissipate, crude oil prices rise by about 40% in the next four weeks and throw a bucket of cold water on airlines yet again.
China Southern Airlines & Coronavirus
China Southern Airlines stock is down 8% over the last four weeks in Hong Kong dollars, beating the MSCI Hong Kong. It’s going lower as the fear index for coronavirus over at Refinitiv is rising. It’s already in freefall on the NYSE. Wait until the market opens today.
On December 30th, 2019, a notice regarding the treatment of a pneumonia of unknown cause was issued by the Medical Administration of Wuhan Municipal Health Committee. China’s RMI value for Refinitiv’s Infectious Disease gauge went from 0.1% to 0.5% in one day. The value range is 0% to 1%.
China Southern Airlines shares rise 2.5%, because fear about a pandemic didn’t set in until weeks later.
On December 31st, 2019, the WHO reports 27 cases of the novel coronavirus. China’s disease gauge hits 0.8% and now China Southern Airlines stocks start to run out of fuel.
China Southern Airlines ADR traded in the NYSE has plunged 22% from January’s high recorded on the 13th to its low on January 27th. It is now in official bear market territory.
China Southern’s move is in line with the 20-30% fall from SARS. “Unless we are dealing with a catastrophic scenario unlike any other seen in recent decades, the bottom should be close,” says Teodoro.
For now, Refinitiv researchers, using their index models as their guide, think that the Wuhan coronavirus has already reached peak global concern status. It is likely that the fear gauge will peak at lower levels than in the SARS case. And the same goes for sentiment drivers.
“In the most extreme cases, SARS sentiment bottomed at around -0.3,” says Teodoro. That indicator goes from a low -1 to a high of 1.
For China’s latest coronavirus outbreak, Refinitiv’s sentiment indicator stands at -0.21 as of Wednesday, January 29, up from -0.24 on January 26.
“We should be reaching the ‘fear peak’ soon,” Teodoro hopes.
Market expectations are for the pandemic to claim the lives of 800 people, putting it on par with that of the SARS death toll. Once that number is reached, everyone will be looking to see if the number of new cases is in decline. If not, and if the case load continues to rise by somewhere between 1,500 and 2,000 persons daily, then the market will reassess and reprice. And for sure Refinitive’s fear gauges and sentiment gauges and whatever other gauges they have in their secret indexing sauce will bubble over.
If it has wings, don’t fly it just yet.