This week we would like to revisit a topic on everyone’s minds, that is the impact of the SARS CoV-2 or Covid-19. With the WHO declaration of a pandemic and emergency, we figured that it might be worthwhile digging a little deeper into the actual virus.
Granted, our lack of PhD’s in the field of epidemiology or anything remotely similar might make many of our thoughts rather generalised but this is a time for open communication and discussion. The important question to ask here is whether the responses by governments around the world - ranging from the virtual house arrests in Spain to the somewhat more laissez-faire attitude closer to home - is warranted? The PM’s recent ban of overseas travel is telling about just how seriously the policy makers are taking the situation.
We must admit, when the virus was in its infancy stages, we took a rather blase view of the issue altogether. We expected that much of the reaction was unwarranted and that the actual virus was not much more than a bad seasonal flu. We were, it seems, very much in the same boat as Trump whose initial reaction, perhaps for different reasons, was that the virus itself has a much lower fatality rate than the seasonal flu. However, recent developments have shown that the rate is in fact higher than that of seasonal flu. What is even more concerning and possibly why some of the more draconian measures by governments around the world have been undertaken is the R0 (or R Nought) figure. Think about R0 as simply this, for an average person infected with a particular virus or disease how many other people are they likely to pass it to while they are in their transmissive stage? A R0 of 1 means that it simply becomes resident in a population, passing from person to person and doesn’t really explode, whereas an R0 of 0.5 means that there is probably a 50% chance that I might pass it to someone else, effectively the disease dies out over time. Seasonal flu has an R0 of 1.28, meaning that approximately on average if you had it you would infect 1.28 people, compound that over 10 days and the infection rate would be approximately 139 people (as opposed to 10 people if the R0 was 1). Now imagine if the R0 was 2 and you can see how this might be a problem, in 10 days the infection rate would be close to 1.05 million people.
Based on the research and numbers available, the new Covid-19 could have an R0 of 2.2 with some credible estimates as high as 4.0 to 6.6, this compares with Ebola with 1.83 or Influenza A at 1.53. It starts to make sense why policy makers are worried. Combine that with another factor, asymptomatic transmission which essentially means that carriers may sometimes not show any symptoms for a good two weeks before succumbing or any notable symptoms at all. In the case of children under ten, the symptoms might be non-existent altogether (i.e. they test positive and are carriers but never show any symptoms). Why is this a problem? Imagine airports and what they commonly use to detect symptoms like temperature measurement. In this instance, people who don’t even realise they are carriers could potentially travel the world willy-nilly and spread it quite accidentally. If this is not contained, it does have the potential to be the Spanish Flu which had the dubious privilege of knocking out close to fifty million people. While the fatality rate might not seem like much, the transmission rate is much higher than the Spanish Flu which stood at an R0 of approximately 1.8. Even if the fatality rate is significantly lower, if there are significantly more infections then the death toll could easily be similar or higher. That is why everyone should be social distancing and taking all reasonable precautions (hoarding two months worth of essentials is not one of them).
It might sound rather callous of us to say so, but the real impact is a trade-off between economic and human. Most, if not all, of the underlying impact will come in the form of government and policy intervention. The containment process itself will have a disproportionate impact both in terms of GDP and overall productivity. If we were to let the virus run its course, economic growth would be somewhat impacted but only moderately so. With a fatality rate in the 3-4% range it should not matter all that much.
Where it gets interesting is the stress this could potentially put on health systems around the western world. It is much easier to contain these types of issues in an autocratic environment like China but much harder to do so in the ‘freedom-loving’ West or indeed most of the emerging markets. This leads us to the possibility of 15-20% of people needing critical care such as ICU’s which is a much more important statistic to consider. Again, it shows why governments around the world are concerned enough to take pre-emptive and somewhat draconian measures aimed at containment, as well as throw the kitchen sink at ensuring that a recession doesn’t follow. At last call, Trump was trying to swing a 1 trillion USD stimulus package in the USA (who knows if he’ll get THAT much through), 330 billion GBP in the UK and close to $20 billion at home (more potentially coming).
Below are some interesting graphs that show what containment taken to the extreme looks like.
China Purchasing Managers' Index (PMI)
(The Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors.)
Again, we are not trying to scare people here, quite the opposite. In fact, if you are relatively healthy and young, this should not be a problem at all.
The thing to watch will be, as we have constantly said, inflation rearing its ugly head again. If responsible governments who are faced with election cycles are forced to act, their first priority is and should be health first and the economy second. The process of containment in the near term will likely force supply chains to be shut down even more than they already are (though China appears to be coming back online). This is why we see inflation rearing its ugly head again, supply chains closing down with fiscal stimulus and a lack of firepower on the monetary side of things creates the perfect environment for it. On the bright side though the next few weeks/months will present decent buying opportunities to get companies at reasonable prices, the markets are in the process of overselling (we won’t try and call the bottom but that is why you average in). There will be sectoral dislocations as well. For example, there will be a lot of airlines that go belly up in the absence of government intervention but those that are left standing at the end will be in a position of greater pricing power with smaller competitors having gone the way of the dodo.
As for us, the past fortnight has been yet another (rather painful) learning curve. One that has bought the notion of the black-swan into the forefront. We continue to watch the markets closely and find ways to be discerning about opportunities as they arise whether it be unloved sectors such as energy (not a buy quite yet) or hedging (though I would dare say buying puts at this point might be a little expensive). You live and you learn. Never stop learning.
On a knife’s edge of a COVID-19 pandemic: is containment still possible?, Public Health Research & Practice
Markets & Commentary
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