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Hidden Market Risk: Bird Flu

A technician deals with test reagents for the H7N9 bird flu virus. Quzhou, China.
ChinaFotoPress | Getty Images

It's the market risk that no one wants to talk about: bird flu.

An unusual strain of avian flu has already killed six people in China, leading the government to kill more than 20,000 birds in Shanghai. The virus is known as H7N9, and it is the same type of virus (Influenza A) as both the H1N1 "swine flu" that became a pandemic in 2009, and the H5N1 "bird flu" that has killed over 550 people since 2003.

(Read More: More Deaths in China From New Bird Flu; US, Japan on Guard)

The effects of this latest bird flu can already be seen in Chinese stocks, especially those in the travel or vacation business. Chinese Eastern Airlines and Chinese Southern Airlines were both sold off hard on Friday, as were Macau casino stocks like Melco Crown and Las Vegas Sands. The Hang Seng index dropped almost three percent on Friday, largely on bird flu fears.

So to what extent could avian flu become a risk for the entire market?

"Given that people are looking for an excuse to sell the market, you could certainly see some pressure here," said Michael Block, chief equities strategist at Phoenix Partners Group.

In China, "You already have some doubts about whether consumption is hitting a wall," Block said, pointing out that February's retail sales number showed the slowest rate of growth since January 2005. "When you have a situation in which people are afraid to go out in public and shop and be consumers, it's concerning, and brings the domestic growth thesis for China to a grinding halt."

So what stocks should investors look out for?

"The airlines are the obvious ones," Block said. But he also named one stock that could get seriously hurt: Yum. "If no one's going to eat chicken in China," Block said," that's going to be a problem."

RJ Hottovy, who covers the name for Morningstar, agrees. "Yum has done a good job of looking at its supply chain and finding any problems. But if this is a widespread issue, that certainly could have an impact on same-store sales for Yum."

—By CNBC's Alex Rosenberg