These are unprecedented times. A once-in-a-hundred-year event. Forget the GFC, 1987 crash or any other correction in human history, the world has never shutdown (stopped) in the manner we are experiencing now. With markets down almost 40% in a month, we dare to begin digging for a bottom and look at some of the signs we are looking for.
Some of the information below is based upon a recent interview in the LA Times and Calcalist publications with Michael Levitt, a Nobel laureate and Stanford biophysicist, who began analysing the number of COVID-19 cases worldwide in January and correctly calculated that China would get through the worst of its virus outbreak long before many other experts predicted. In our mind, this is key to understanding when the markets will bottom.
Michael is now predicting a similar outcome in the United States and around the world. Although many experts are now warning of many months or years of social disruption and deaths, the data simply doesn’t support such a dire scenario where appropriate measures such as the ones taken in China, Singapore and Taiwan are taken to contain the virus. Policy makers mostly seem to be firmly entrenched in the hoping for the best, planning for the worst perhaps?
It all began when Levitt noticed that, on January 31st, China had 46 new deaths due to the virus, compared with 42 new deaths the day before. Although the number of daily deaths had increased, the rate of that increase had begun to ease off. In his view, the fact that new cases were being identified at a slower rate was more telling than the number of new cases itself. It was an early sign that the trajectory of the outbreak had shifted.
In a report, Levitt wrote “This suggests that the rate of increase in the number of deaths will slow down even more over the next week,” And soon, he predicted, the number of deaths would be decreasing every day. This is the “flatten the curve” that has become the catchphrase of this crises.
Three weeks later, Levitt told the China Daily News that the virus’ rate of growth had peaked. He predicted that the total number of confirmed COVID-19 cases in China would end up around 80,000, with about 3,250 deaths. This forecast turned out to be remarkably accurate. As of March 24th, China had counted a total of 81,171 cases and 3,277 deaths.
Furthermore, this week Chinese government officials have finally lifted the border closures across the epicentre in Wuhan. The number of new infections in China has dropped to less than 50 a day in a nation of 1.4 billion people where 10 million people die every year.
Now Levitt is seeing similar turning points in other nations. He analysed data from 78 countries that reported more than 50 new cases of COVID-19 every day and he is seeing signs of recovery in several. The key is not to focus on the total number of cases in a country, but on the number of new cases identified every day and the change in that number from one day to the next.
In South Korea, for example, newly confirmed cases are being added to the country’s total each day, but the daily tally has dropped in recent weeks, remaining below 200. That suggests the outbreak there may be winding down. While one might be sceptical of the Chinese data (to an extent, rightly so), South Korea’s numbers shouldn’t be treated with the same reservations.
In Iran, newly confirmed cases per day remained relatively flat last week, going from 1,053 last Monday to 1,028 on Sunday. Although that’s still a lot of new cases, the pattern there suggests the outbreak is potentially at or past the halfway mark.
Levitt acknowledges that his figures are messy and that the official case counts in many areas are too low because testing is incomplete. While not ideal, the data and analysis is still useful. As long as the reasons for the inaccurate case counts remain the same, it’s still useful to compare them from one day to the next. The trajectory of deaths backs up his findings, since it follows the same trends as the new confirmed cases.
It important to note that both Levitt and we at TAMIM strongly advocate for strong measures to fight the virus outbreak. We urge investors to adhere to social distancing rules and avoid large gatherings completely. We mustn’t be complacent anymore.
So, with all this in mind, when will the markets bottom? What data needs to be carefully monitored?
We are in somewhat unchartered waters here; in many previous economic downturns and large market corrections it was the easing of monetary conditions and increases in fiscal stimulus that ultimately signalled a market bottom.
During the GFC in 2008/09, for example, the markets only bottomed when central banks provided bailouts and guaranteed to stave off bank defaults while cutting rates to almost zero. In the mid-70s recession and oil shock, it was the reduction of interest rates from 12% to 5% that helped restore confidence and turn economies around. And, finally, going back to 1929 and the Great Depression, it was the uncoupling of the US dollar and gold to enable money printing and a concerted effort by governments to provide fiscal stimulus to see a bottom.
Unfortunately, this time it is truly different. The current market collapse is not as a result of a financial crisis, collapse in asset price bubbles, interest rate shock or any other weak economic conditions. The reality is the world is shutting down economic activity due a virus. The harsher part of this reality is that the global economy could have trundled on as it was with relatively minimal disruption (compared to now at least) if the virus was left to run its course. Those in at risk demographics would have suffered tragic losses. Everyone would likely know someone who died but most people would still be working, and economies would still function. There may have been a large transfer of wealth from one generation to the next, who knows. But we are human and that is an unacceptable outcome, we do not value human life so flippantly. The world is, broadly speaking, valuing the health of people over the health of the economy and rightly so. Looking at the leaders a bit slow off the mark with appropriate responses, it is the ones needing a strong economy headed into the pointy end of an election cycle that put it off longest (looking at you, Donald).
Hence we believe that, although the monetary and fiscal stimulus plans that are currently being announced by governments globally are important to soften the landing, it will be the decline of daily new infections in key economies around the world (US, Europe, Australia) that will signal the market bottom and see us emerge from this generational event once and for all. It will be the hopeful “it’s almost safe to return to work”, not stimulus packages, that will actually begin to kick the economy back into gear.
In our view, the local and overseas markets want Australia, the US and other countries to shut down temporarily and follow China’s lead and see new infections decline. When this is confirmed, we see a very strong recovery as all the stimulative monetary and fiscal policies take effect in a more positive environment and restore the economy back to something resembling normal. If governments take these appropriate measures quickly, we anticipate the bottom is potentially one to two months away at most (if forced to pick a month, TAMIM’s pick is May).
We are monitoring data on new infections daily and have positioned our portfolios to be able to take advantage of this when the time comes to deploy.
A Message From TAMIM
This is an evolving situation, the 'facts' and figures are changing day by day. One must stay informed and have their opinions and actions evolve accordingly. Stay safe, take appropriate precautions and be sensible.
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