• Investment
  • 19 June 2020

The science of reopening

  • Rapid developments in treatments, testing, vaccines and contact tracing keep pace with hopes of re-opening economies.
  • Race is on for a vaccine that is efficacious and able to scale up in production.
  • Some hopeful signs that the economic impact of second waves of infection will be relatively contained.

Scientists around the world are racing against time to overcome the overwhelming Covid-19 related hurdles that stand between us and the full re-opening of economies around the world.

Concerns over a second wave of the Covid-19 pandemic across US cities and Beijing, China sparked a reality check among retail and institutional investors about the state of affairs in the real world vs. capital markets.

From the trough in mid-March, the S&P 500 Index has rebounded sharply by 40% before the 6% correction on 11 June 2020. The V-shaped recovery in stock markets is no guide for the economic reality. The International Monetary Fund (IMF) projects a -3% global economic contraction in 2020 due to the Covid-19 pandemic, assuming that the pandemic fades in 2H2020 and containment measures ease. The IMF expects global growth to recover to 5.8% in 2021 as economies normalise with policy support.

As the number of Covid-19 cases rise and ebb, will volatility return and will capital markets revisit the March lows? We argue that this will not be the case for three key reasons.

1) The ultra-loose monetary policy by the Federal Reserve and other major central banks will keep rates lower for longer; Fed Chair Jerome Powell has reiterated the Fed’s policy stance to provide additional liquidity into the financial system;

2) Governments around the world are posting record budget deficits to support the economies and face political pressure to gradually ease containment measures;

3) Scientific progress in tackling the Covid-19 pandemic and the preparedness by the healthcare sector mitigate the risks of gradual reopening of economies globally.

Testing & Therapies

The availability of test kits and increased rate of Covid-19 testing partly explains the rise in the number of cases in recent months. Iceland, Luxembourg and Estonia have tested more of their populations for coronavirus than any other countries, according to data from the Organization for Economic Co-operation and Development (OECD).

The lowest levels of testing in OECD countries are in Mexico (0.6), Japan (2.2) and Columbia (2.3), while the average testing rate for all OECD countries is 27.7 tests per 1,000 (Exhibit 1). As the US reports over 2 million Covid-19 cases and over 115,000 deaths, while populous US states such as Texas and Florida reported a rise in number of new cases, the increase has been accompanied by a step up in viral and antibody testing across the states.

Meanwhile, the reopening of economies globally continues to gather pace. In Singapore, the government has announced the second-phase reopening of its economy effective 19 June 2020, noting that community infection rates have remained stable with no new large clusters emerging since the first-phase lifting of some restrictions on 2 June 2020. The further easing of earlier restrictions will allow a broad range of economic activities to resume, including the reopening of many physical retail stores and dining-in at food and beverage outlets.

In the United Kingdom, England’s non-essential businesses such as department stores and bookshops were allowed to reopen after more than 80 days of lockdown, with reports of large crowds and long queues of shoppers gathering at fashion retail outlets.

Elsewhere in Europe, countries such as Greece, Spain and France are even starting to reopen their borders to selected tourists.

Exhibit 1: Diagnostic testing for Covid-19 in OECD countries

Source: Testing for COVID-19: A way to lift confinement restrictions, OECD, published 4 May 2020; Our World in Data
Notes: 1. People or cases tested. 2. Tests performed or samples tested. 3. Units of test unclear or inconsistent. Differences exist as to whether figures include tests, or individuals tested; whether they include all lab tests (public and private) or not; on how regularly data is updated by each country; and other aspects. Date of testing data shown in the graph varies between 26 April and 3 May 2020

Vaccines & Victories

The race is on for a vaccine that is efficacious and able to scale up in production.

There are at least 126 candidate vaccines in preclinical evaluation and 10 candidate vaccines in the clinical evaluation stage developing across consortia of universities, biotech and pharmaceutical groups across US, Europe, China, India, Japan, Singapore, Thailand and Australia, according to the latest update published on 9 June 2020 by the World Health Organisation.

At the University of Oxford, the coronavirus vaccine candidate ChAdOx1 nCoV-19 entered the human trials stage on 23 April. This was developed by genetically modifying the ChAdOx1 virus – a weakened version of an adenovirus that causes the common cold – and making it impossible for coronavirus to grow in humans. Deliveries of the vaccine are expected to start by the end of 2020.

Data Analytics & Contact Tracing

Besides medical and biotech breakthroughs, scientific advances in data analytics, artificial intelligence will be critical for contact tracing and containment measures that support a return to re-opening economies in a risk-managed way.

Technological advances in contact tracing apps are providing public health officials the confidence that digital controls can be in place to contain an outbreak. Cross-disciplinary research across epidemiology, digital technology, data science and engineering software development is creating new applications which aid the contact tracing, contact isolation and social containment.

In one such study, the Guangdong Centre for Diseases Control and Prevention has partnered Oxford University to describe the epidemiology and genetic make-up of the Covid-19 outbreak in China’s most populous region, showing how early and intensive testing and tracing helped to interrupt local transmissions.

What does this mean for investors?

The situation regarding second waves of infection remains a wild card and will continue to drive volatility in markets, as evidenced by the sharp sell-off on 11 June when the S&P500 sank 5.9%.
Clearly, the situation regarding infections will continue to evolve, but we expect the economic impact of subsequent waves of infection to be relatively contained. The public and policy makers now have greater knowledge and awareness about the virus, there is reduced political will to re-impose full shutdowns, and policy makers have already implemented unprecedented stimulus with a significant degree of success in supporting financial conditions – and they stand ready to do more if needed.

Moreover, the development of vaccines is moving at an accelerated pace, with key players poised to start their phase 3 trials in July, August and September respectively.

We believe that the overall outlook has incrementally improved with incoming data confirming that the worst of the pandemic’s economic impact is behind us. We continue to hold an overall equal-weight view on equities and an overall overweight view on fixed income through EM high yield bonds.

Considering the risks related to the uncertain economic outlook, the 2020 US Presidential Election, rapidly escalating US-China tensions, and the fact that valuations have likely priced in a large part of the positive market factors today, we do not believe it is time to go overall overweight on equities. We would focus on maintaining diversified exposure with long-term structural winners and companies with resilient balance sheets that would benefit from a rotation into Cyclicals and Value players as the global economy continues to re-open. 

Video: Investment Strategy: The Science of Reopening

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Version: March 2020