Financial markets will not wait for complete clarity and certainty on the impact of the COVID-19 pandemic. Forward-looking investors will increasingly focus on the end game for the virus – where we are heading in terms of the public health strategy and the socio-economic impact, and how fast we get there – and asset prices will respond accordingly.
We are investment specialists, not epidemiologists, but it is essential that we stay on top of the science. Markets loathe uncertainty and news on the virus, good or bad, will set the agenda for weeks and even months ahead.
Hence, to keep abreast of the virus, we are focused on the following themes.
The near-term loss of life given community spread
The impact of COVID-19 on mortality appears to vary from country to country, even for a given rate of spread, and that likely reflects a range of factors, from demography, the incidence of prior conditions and to the quality and capacity of the healthcare system.
However, it seems near certain that large numbers of people will die given large numbers of people in the population in old age and with those prior conditions and moreover given the capacity constraints in intensive care, both in terms of equipment and personnel. Indeed, the study by the Imperial College COVID response team suggests that even if all patients could be treated, there would still be in the order of 1.1-1.2 million deaths in the US.
Have Asian governments taken back control for good?
There has been a lot of focus by the media and markets on the caseload in North Asia and with good reason: the authorities there have managed to take back control through rapid and robust action. There is always the risk that the virus will flare up, either because it is carried into the country, or because the containment strategy proves porous, or because extreme lock-down measures are lifted.
If the vast majority of the population of Asia has not had the virus, it has no immunity and therefore these societies remain at risk of community spread. This war will not easily be won, and certainly not while relatively few people have been exposed to the virus. Nonetheless, the results of the measures taken in Asia speak for themselves, and the longer that those societies can function without extreme social distancing measures and without a renewed surge in cases, the more they set a template for others to copy.
Test, test, test
The capacity of the authorities to respond effectively to the virus hinges in no small part on their capacity to test. Social distancing measures carry large socio-economic costs. When this lock-down ends, the authorities will no doubt be keen to avoid another. However, in the absence of effective public health measures, the virus will soon start to spread again. And we know that people can spread the disease long before they display symptoms.
If the authorities want to implement a South Korean style response, they will need to deliver a step change in their capacity to test, so that new cases can be identified quickly and a quarantine imposed. Likewise, it is critically important to know how many people have already had the disease and acquired immunity and that requires a serological test. Once you know who has had the disease, you have a much better idea of when society might reach herd immunity. Obviously, both tests are of critical importance in managing scarce resources within the healthcare system.
Treatment and cure
Work on antiviral drugs and a vaccine is underway, but there is a limit to what can be achieved in particular where timing is concerned. The scientists will understandably be nervous about administering a prototype vaccine to a healthy population that might have dire side effects. According to most optimistic scenarios, the earliest available vaccine is at least six months away, but it could take about 18 months to complete trials, scale up production and make it widely available.
Learning to live with COVID-19
Hopefully, common sense and effective communication from the authorities will help the public make the necessary adjustments to increase the chance – or perhaps the amount of time – that society can revert back to something approaching normality. After all, it is highly unlikely that a vaccine will be available for many, many months to come. But as acquired immunity gradually increases in the population, it will be possible for the vast majority to return to life as normal without triggering a sharp rise in the caseload, although this will likely require a cultural shift to mass diagnostic and serologic testing and better hygiene standards.
Over the coming weeks, we will provide a weekly update on how these themes are progressing and the implications for investors. Please visit Investors’ Corner on Wednesday for more information.
