Flu Expected to Hit Equity Market

The spread of influenza A (H1N1) is adding to factors having a negative effect on the stock market, which seems to have lost momentum.

The disease used to work positively on some stocks such as pharmaceuticals, but its wider spread could pull down the bourse, according to analysts.

Apparently, some have benefited from the flu fear. Share prices of Green Cross, a domestic drug maker which produces vaccine for flu, rose nearly 14 percent in October. While the main KOSPI fell by 5.53 percent, medical and pharmaceutical shares rose 2.37 percent.

However, the pandemic could shatter the market.

Hana Institute of Finance said in a report that the economy could falter again on the flu virus. When the flu gets more serious, increasing the number of the infected and pulling up the death toll, the effect on the economy could be disastrous.

It cited a number of pandemics in the past. The Asian flu, which broke out in 1957, for example, pulled down the GDP growth rate of the United States, causing it to contract 0.9 percent the next year, from 2 percent during the previous two years.

The flu that started in Hong Kong in 1968, which later spread worldwide and led to over 100,000 deaths, dragged the U.S. GDP growth down to 0.2 percent in 1970 from 3.1 percent in 1969.

More recently, the spread of SARS pulled down the share prices of Singapore and Hong Kong by around 10 percent from March to May of 2003.

Analysts explain that consumption ― in the private sector especially ― falls on the fears over flu. The services sector, entailing restaurant, travel and lodging, retail and wholesale, and culture businesses, are likely to be hit first. The share prices of Hana Tour saw an over 10-percent daily plunge upon the news of the first flu victim here in August.

As it continues, even world trade could decrease, pulling down the country's exports. Corporate investment and the job market are also likely to get sluggish upon a gloomy outlook on the economy. ``The outlook for the coming months is highly uncertain. On the one hand continued improvements from inventory restocking and a revival of domestic demand will help production grow further. But global demand remains weak,'' said Alaistair Chan, an economist at Moody's Economy.com.

Hyundai Economic Research Institute estimated the GDP growth rate could fall by up to 7.8 percentage points, which inevitably would cloud the stock market.

The stock market has already lost momentum, with transactions falling to the lowest level this year on uncertainties about the future.

According to the Korea Exchange, daily transactions on the main bourse totaled 365.5 million shares in October, down over 100 million from the previous month. It is even smaller than the daily transactions of 380.1 million shares this January.

The turnover rate of stocks, or transactions divided by the number of listed shares, stood at 25.11 percent ― plunging 10 percentage points from the previous month. The turnover rate recorded 54.3 percent in April.

Fewer transactions mean the stock market will fluctuate hugely on small news.