Covid-19: thinking the unthinkable

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Covid-19: thinking the unthinkable
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Master Investor Magazine Issue 59

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Suddenly there is only one topic on the agenda. The World Health Organisation (WHO) is about to declare a global pandemic for the first time since 2009. Global markets are finally reeling. Things will get much worse before they get better, writes Victor Hill.

The virus has already infected the markets

For more than one month global equity markets just ignored a mounting threat, even as the news-flow became more concerning. On Monday this week (24 February) that all changed when $1 trillion was wiped off the value of global equities. The Dow Jones was down by about 3.5 percent and the FTSE-100 by 3.3 percent. European bourses were down by even more. The sell-off has continued at a less dramatic pace all week.

We knew the onset of the corona virus (Covid-19) was already disrupting supply chains. But over the weekend the world learnt that there were significant clusters of cases in South Korea, Iran and Northern Italy. That changed sentiment.

Last week it became clear that container traffic from Chinese ports had collapsed by approximately half and companies such as Jaguar Land Rover (JLR) admitted that they were running short of Chinese-manufactured components. European and US automotive manufacturers are already having to airlift components from Asia at huge expense.

SeaIntelligence Consulting, the Copenhagen-based freight data outfit, estimated last week that about 300,000 containers had failed to leave Chinese ports as scheduled. Because unloading berths were occupied by container ships, ships arriving in China were unable to dock. Perishable goods such as meat were spoiling as a result. This has had a knock-on effect, with ships failing to return to US and European ports on time. It seems that there will soon be a severe shortage of containers globally.

Much of China has been in lock-down since the Chinese Lunar New Year holiday (25 January). This has had a huge impact on the Chinese economy across all metrics. Even if the virus is contained by the end of Q2 (unlikely) China is set to have its worst growth outturn for nearly half a century.

Arguably, the developed world is better positioned to cope with the prospect of restricted mobility because, thanks to advanced telecommunications, most professional people can work from home. Zoom (NASDAQ:ZM) is up by 65 percent over the last month. There is anecdotal evidence that many companies have been adopting its video-conferencing technology in response to the threat posed by the virus.

Other winners from this unhappy saga include Gilead Sciences (NASDAQ:GILD) up 21 percent on the month after a WHO official said at a briefing in Beijing that its experimental drug Remdesivir might be efficacious.

Pathology and epidemiology

The original strategy of the Chinese authorities to contain the virus within Hubei Province has failed. It is too early to ascribe blame for that, in my opinion. What is worrying is that the Italian and Iranian clusters cannot be directly linked to China. The attempt by the Japanese authorities to contain the virus by quarantining a cruise ship backfired. (One third of the people on a cruise ship are crew who live cheek-by-jowl in the bowels of the ship. The Diamond Princess actually became a breeding ground for the virus.)

SARS, which originated in China and lasted from 2002-2003, is thought to have been derived from bats or possibly civet cats. As was MERS, a similar bat-borne coronavirus that has killed hundreds of people and camels in the Middle East since 2012. Covid-19 is much more contagious than either of these but less lethal. There is no single strict definition of a pandemic: it is a subjective term for an infection (bacterial or viral) which affects a lot of people over a wide geography. Covid-19 is a pandemic, whether the WHO says so or not.

Up to 20 February it was thought that the “R0 value” of Covid-19 was between 2.0 and 2.5[i]. That means that every infected person was likely to infect 2-2.5 other people. Obviously the R0 value can be reduced by confinement and quarantine. The R0 value for winter flu in the UK is about 1.5. On 26 February Dr Chris Smith, a virologist at Cambridge University, told the BBC R4 PM Programme that the R0 for Covid-19 was more likely to be between 3.0 and 4.0.

That means it can spread more rapidly than common flu. People who recover from the virus supposedly become immune (though this has now been questioned): thus the number of people suffering from it will peak at some point in any given population. In a country with reasonably good healthcare the pandemic models suggest that it could affect between 60 percent and 80 percent of the population relatively quickly. Based on the Chinese data, Dr Smith suggests that 80 percent of those who do catch the virus will experience “trivial” flu-like symptoms; and about 20 percent will experience more severe symptoms. About one fifth of the latter 20 percent (so 5 percent of the total) will have very severe symptoms. For the elderly, people with chronic conditions and compromised immune systems, it could prove fatal.

The other variable therefore is the mortality rate – how many people who succumb to the virus die from it. Because this virus is newly circulating, nobody yet has any natural immunity and the medical profession seems to be reluctant to estimate the mortality rate with any precision.

As of Wednesday, the WHO reported 80,350 confirmed cases worldwide and 2,705 fatalities. That implies a global mortality rate of 3.37 percent. That is almost certainly an over-estimate as there must be many people who are infected but who don’t yet know it. (I do not believe that there are no cases in Kenya where there are tens of thousands of Chinese workers.)

Happily, the mortality rate for under-tens is very low at about 0.2 percent; but for over-80s it may be as high as 8-14 percent according to Dr Lindsay Broadbent of Queen’s Belfast. And the mortality rates will vary from country to country in accordance with the general level of healthcare. On the whole, unless transmitted by insects, dirty water or sex, new diseases become less virulent as they evolve.

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Nevertheless, if we were to suppose that about 70 percent of the UK population (roughly 65 million people) were to succumb to the virus and that the mortality rate is half that I cited above – so, 1.68 percent – a general outbreak in the UK could result in over 750,000 deaths.

The death rate last year in the UK was 9.2 per 1,000 people, so this year we might assume that about 600,000 of us will die in the natural order of things (of which about 600 from winter flu). An extra 750,000 deaths would be impossible to manage by conventional means – the funeral industry could not cope. So we would be talking mass graves – just like during the Black Death (1348) when London’s dead were carried in barges down the Thames to be dumped in the marshes. (Hence the riverside heritage town of Gravesend).

This is the stuff of nightmares – but you can be sure that the clinicians and mandarins are conjuring with these numbers. Even if the mortality rate is one twentieth of the one I have postulated, the NHS, already creaking at the seams, would be overwhelmed – with all the consequent political fallout that would entail.

The great hope is that a vaccine will emerge soon. This week a scientist in China announced that he had already developed one. But developing a vaccine is a group effort; it must then be rigorously tested: and only then does it go to manufacture. Even if the vaccine works it will be impossible to manufacture by the billion for at least one year – and probably 2-3 years.

Human beings now live together in massive numbers in extraordinarily high densities and they travel internationally continuously by air. With 7.7 billion people on the planet and more on the way, even if Covid-19 doesn’t get us, another ambitious micro-organism eventually will.

According to Lord Ridley the pangolin version of the virus is 99 percent similar to ours. He thinks that captured pangolins, on sale in the live animal market in Wuhan (mainly imported from Malaysia), had somehow caught the virus from bats. Pangolins are globally endangered because of demand from China. And the entire world is now paying the price.

The year ahead

The Irish Rugby Union has cancelled the Ireland-Italy fixture in the Six Nations rugby tournament due in Dublin for 07 March. It is difficult to see how that match could be re-scheduled; so the much-loved tournament has effectively been ruined.

Yesterday (27 February) Japan announced the closure of all schools for one month. It is difficult to imagine how the Olympic Games, due to open with great fanfare in Tokyo on 24 July, will now take place. That will be hugely disappointing to Japanese people and for sports fans everywhere. But that will be as nothing compared to the cancelled holidays, empty airplanes and deserted shopping malls across the globe.

Unforeseen consequences: USA

In the early stage of the epidemic some commentators spoke of Mr Trump’s good luck. The idea was that the epidemic put China on the back foot in the second round of US-China trade negotiations. But there is now a view circulating that a global pandemic could work against Mr Trump and in Mr Sanders’ favour. It’s not so much that his supporters are unaware of Mr Sanders’ extreme socialist sympathies as willing to overlook them in order to advance the Medicare-For-All (M4A) programme.

Mr Sanders is now emerging as the clear front-runner in the race for the Democratic presidential nomination. Mr Biden is all but dead in the water and Mr Bloomberg has made a very shaky start – despite the pit of money already spent. Next week, after Super Tuesday (03 March) the extent of Mr Sanders’ lead should become clear.

If Covid-19 hits the USA, even at the margins, it will disproportionately affect the least well-off and most vulnerable citizens who have little or no medical insurance. That will put the focus of the campaign back onto M4A which is already widely supported by the younger and ethnic minority demographics. Mr Sanders will argue, with some justification that, with borrowing costs at near-zero levels, M4A has never been more affordable.

Furthermore, a serious iteration of the virus in America – maybe a threshold of just a few hundred deaths would be critical – will provoke a stock market rout. The conventional wisdom has been that so long as the stock market holds up, Mr Trump will be home and dry. But a pronounced market sell-off of 20 percent or more would severely dent Mr Trump’s feel-good message…

I am in correspondence with an Australian political scientist who has correctly predicted the outcome of every election in the English-speaking world since 2015. He thinks that Mr Sanders will win the nomination – and that he will narrowly defeat Mr Trump on 03 November. He further thinks that Mr Trump will contest the outcome, ascribing Mr Sanders’ victory to foreign interference. The chance of widespread violence across the USA, in his opinion, is considerable. This scenario becomes much more likely in the event of a major epidemic with thousands of fatalities.

There is an old adage that long-standing bull markets do not come to an end of their own accord. They are killed by unexpected events: be it a systemic banking crisis – or a pandemic which results in the collapse of world trade, dislocation of global supply chains, food shortages and the threat of widespread social unrest.

Oxford Economics says that a global pandemic would push both the US and Europe into immediate recession. If that happens then there will be little prospect of recovery for years. Central banks have nowhere else to go, with interest rates at rock bottom and the money presses already working flat out.

The holding plan

Up to 13 February we understood that the rate of new infections in China was slowing and that the overwhelming majority of cases were still concentrated in Hubei Province. On Wednesday (26 February), however, the WHO announced that, for the first time since the virus appeared last year, there were more new cases recorded outside China than within China. This is no longer just China’s problem.

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Back in the UK, also on Wednesday, Health Secretary Matt Hancock MP announced a four-point strategy in the House of Commons: Contain, delay, research and mitigate. This in a country where no incoming travellers are tested and no travel restrictions of any kind have been imposed.

Hearing prophetic voices…

The Eyes of Darkness was a thriller written by Dean Koontz published in 1981. The plot concerns a mother who discovers her son is being kept in a military facility after being infected with a man-made micro-organism called “Wuhan-400”[ii]. A quote:

To understand it, you have to go back 20 months…It was around then that a Chinese scientist named Li Chen defected to the US, carrying a diskette record of China’s most important and dangerous new biological weapon…

There is indeed a Wuhan Institute of Virology, which is said to be China’s highest level classification biochemical laboratory. It is located 20 miles from where Covid-19 first broke out. Further excerpts of the book describe the virus as the “perfect weapon”. It afflicts only human beings and no other living creature can carry it. Another quotation:

In around 2020 a unique pneumonia-like illness will spread throughout the globe, attacking the lungs and the bronchial tubes and resisting all known treatments. Almost more baffling than the illness itself will be the fact that it will suddenly vanish as quickly as it arrived, attack again a year later, and then disappear completely.

I’ve always said that fund managers should read thrillers and history books in their spare time. If and when we are confined to our homes indefinitely we shall have plenty of time for discursive reading.

[i] Source: National Health Commission of the PRC, as reported by Jeffries Hong Kong Limited.

[ii] See: It seems that in the 1981 original version (published under pen name Leigh Nichols) the microorganism’s name was Gorki-400. Only later in the 1989 edition was the name was changed to “Wuhan-400”.

Comments (3)

  • Michael Lavelle says:

    A somewhat pessimistic viewpoint. However, to effectively reduce the R0 (reproduction number) one has to lockdown and this creates a problem for the local economy especially pubs, restaurants, leisure and entertainment facilities. A flu induced recession is on the cards for sure. The disease also presents significant problems with regard to hospital beds for the critical 5%.

    I must commend the Chinese for doing such a good job in locking down 750 million people. This has bought the West more time, but have we used it wisely?

    Keep safe.

    Michael Lavelle

  • K.B Saunders says:

    A complete over reaction. Yes, the virus has spread, but to get things into prospective influenza kills over 17000 people every year in UK, and the mortality rate of Covid-19 is small, unless one is over 80.
    The markets are run by algorithims and people under 40 who only have a very short-term trading view. Investors should consider the panic as a great buying opportunity for businesses that have solid fundamentals and who actually make money.
    Businesses with fragmented supply chains based on Chinese or other Asian/third world cheap labour were always going to be high risk.

  • catherine Souter says:

    Terrific article Victor. The most informative I have read on this subject so far.

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