Bird flu is a step into the unknown for investors

Spreading bird flu is presenting the world's investors and financial markets with just the kind of risk that is hardest to deal with - the unknown.

Familiar geopolitical or economic risks can be priced in to assets. Even a major war can sometimes be planned for. But bird flu is a nebulous peril.

"We just don't know how it is going to pan out," said John Ip, a senior economist with Morley Fund Management in London.

Despite the recent resurgence of avian influenza and a spread into western industrialised countries - Group of Seven members France, Germany and Italy have reported outbreaks this month - financial markets have paid scant attention.

They remain driven by factors such as rising US interest rates, mergers and acquisitions, and spikes in the oil price. One reason is that bird flu has not yet wrought much damage, at least in relative terms.

The number of human dead from the H5N1 strain is only 92 globally since 2003 and many of the outbreaks among birds have involved wild species such as swans. There has also been limited economic impact beyond localised costs. More trenchant is the fact that while there have been limited bird-to-human infections, the virus has not mutated into a human-to-human variety.

That possibility has been the big worry, prompting the World Health Organisation and others, including investment banks, to warn that bird flu could suddenly become a catastrophic pandemic with horrendous human and economic costs.

But whether it happens and to what degree remains pure conjecture. Beyond a few strategically based bets on pharmaceutical companies, investors are generally unmoved.

"At the current level, it just is not an issue," said Michala Marcussen, head of strategy and economic research Societe Generale Asset Management in Paris.

Investors know how to deal with various kinds of risk. To borrow loosely from US Defence Secretary Donald Rumsfeld, take what might be called a known known, something investors know will happen and generally know what to expect from it.

The US-led invasion of Iraq in 2003 was a case in point. Uncertainty on financial markets was limited to when it would happen and whether there would be any upsets.

Investors cut back on risky assets such as stocks and piled into safe havens as the start of war seemed to near. They then flooded back into risk when it was clear that the war at least was going as they had assumed it would. Now take what might be called a known unknown, an event that investors clearly know about but with an unknown outcome.

In those circumstances, they put a premium on assets likely to be affected, such as the $1.50 a barrel that went onto oil this week as militant violence increased in Nigeria. Such premia probably remain until a clearer picture emerges.

Bird flu might be presented as an unknown unknown. In terms of it being a major event, investors don't know if it will happen and don't know to what degree it will impact on them if it does.

"That's a massive wild card out there," said Youssef Affany, head of investment counselling in Europe for wealth manager Citigroup Private Bank in Geneva.

"(But) there are very few things you can do directly."