Case study: SARs on the economy

GDP Implications

SARs occurred in 2003. The first case was reported in China, Nov 2002.
As for most of the countries, I.e Hong Kong, Canada, Taiwan,Singapore, Vietnam etc. The first case was detected in Mid Feb 2003, and the last case reported was around Mid May 2003.

As you can see, effectively there was only 4 months of 'serious activity' from Mid Feb 03-Mid May 03. This is supposedly the time frame where the economy is responding to the crisis first hand.

Above is the GDP variations of the different countries during that time frame.

Looking at the statistics above, there is no doubt that during the outbreak period, GDP is bound to drop. However recovery follows soon after the last case is reported.( However at that moment in time, we will not be able to tell if the reported cases are going to stop. )

This means that it is highly unlikely that the economy is going to get better if the disease is not under control and/or if new cases are found.


Stock Market Implications

The diagram above shows the STI during the SARs period.

Looking at the stock market, generally sentiments is that, during the period of disease outbreak, expect little advances in the market (makes sense, cos the GDP is negative). Hence it is definitely more favorable to do shorting than trying to go long.

In addition, it looks like the impact of the first reported case and the depth of the market is not immediate too. There is a time lag as seen in the diagram above. First case in Singapore was detected on 25th Feb 03, and the lowest point of the market occurred on 10 Mar 03. Which is a lag time of around 2 weeks.

So..a possible trading strategy could be to buy put warrant on the STI, or short the index, with a time frame of maximum 2 weeks when the first swine flue case occurs in Singapore. If history repeats itself, you should be rewarded.

*Trade at your own risk