November 15, 2020

Covid-19 and Financial Markets 12/11/20

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The Divided States of America

Leaving aside the fact that the US election has been topical for the last few months the reason why I often focus on all things American is due to the scale of its economy and its knock on impact on worldwide financial activity and, by extension, global stockmarkets. Covid-19 and Financial Markets for the time being must co-exist.

There is no doubt that there is a growing Republican acceptance of the Biden win even if President Trump insists that he is “the legal winner”. So from here on the focus will be where the political power lies. And by this, I mean the ability to pass legislation that is effective and not stuck in “No Man’s Land”. The US, as in Ireland, has two legislative Chambers, the House of Representatives and the Senate. The Democrats now hold at least 218 seats in the House to have the majority (before the election this was 232) but only hold 48 seats to the Republican’s 50 in the Senate. There are 2 seats in Georgia which require a second/run off election in January and if the two Democrat candidates win then the base Senate numbers will    be equal leaving Vice President (Elect) Kamala Harris with a casting vote assuming that all future voting in the Senate goes along party lines. If the Democrats lose one of these seats in Georgia, the Republicans will continue to hold the upper hand and may stymie Biden’s agenda.

Leaving aside the last 4 years even Obama experienced a Republican Senate making his legislative agenda impossible at times to advance. While Biden is known in the past for reaching across the aisle it is still a tough ask without control of the two Chambers. Major differences on Healthcare and Climate change to mention but two will continue and this will influence tax and social security policies. All this before the elephant in the room, so to speak, Covid. From a medical perspective and the related financial implications there will be long term implications on tax receipts and social security funding. These poisoned chalices inherited from Trump’s mishandling of Covid will have to be dealt with in the next 4 years and may actually compromise Biden & Harris’ re-election bids then. Time will tell.

51.6m and 1.28m, not out.

As at the time of writing this update there has been 51.6m global infections and 1.28m deaths. Of these10.3m infections and 240,000 deaths have occurred in the US.

The infection figures can be misleading as these are the numbers of suspected cases who have tested positive for the virus. They do not include those in the global population who are asymptomatic and who are unwitting spreaders of it.

Back in April there was a warning that between 100,000 and 250,000 deaths might occur in the US. Now 550,000 deaths by February is a serious possibility especially bearing in mind that the US seems to be running 3 weeks behind the European uptick in infection rates. India and Brazil are also showing huge growth in infections which was only to be expected based not only on their large populations but also on their national leaders’ poor response to the pandemic. It seems that right winged politicians worldwide have made poor responses to Covid and their people have paid the price both in health terms as well as financially. By way of a reminder Ireland has had 66,247 infections and 1,965 Covid-19 related deaths.

Source: John Hopkins University of Medicine

Interestingly enough, the countries with the highest mortality rate for observed infections are Mexico, Iran and Italy next followed by the UK in fourth place. It’s not an accolade that any country would want.

Source: John Hopkins University of Medicine

The Medical Issues

From a socio economic and health perspective it is important to understand how and where the various medical responses fit in. This Covid pandemic is regarded by some experts as probably the biggest medical crisis to face humanity. The next three months will show the real impact as lockdowns in Europe try to contain its spread. It will also be interesting whether Biden, when he becomes President, will be able to implement any serious lockdowns, especially considering the gun totting right to bear arms of US citizens. There may be a number of serious flashpoints that could arise.

The issue of hygiene is one that was initially and is still adhered to by most of the global population unless, of course, you happened to live in a country where right wing politics is in the ascendency. It is estimated that universal masking in the

U.S. could save some 130,000 lives if used between now and the end of February, according to an analysis by Colombia University. The analysis also suggests that the same figure is the minimum number of lives that would have been saved already had the Trump administration not botched its response to the pandemic.

Where Test & Trace can be used and is well organised it can be very effective. Key to this are having sufficient testing and timely responses as well as a willingness of the general population to abide by the rules. Furthermore, according to criteria published by the World Health Organisation, a positivity rate of less than 5% is one indicator that the epidemic is under control in a country. In many democratic societies including Ireland the capacity for quick turnaround testing as well as subsequent tracing of the contacts has seen a poor outcome. At the other extreme China, an autocratic State, has been  able to carry out massive testing of millions within a week when needed and, when necessary, people self isolate or face serious consequences. A key weapon in such an approach is the use of a Tracing App such as that which we in Ireland use. Surprisingly the development and usage of such apps on a global basis has been somewhat sporadic at best.

When the Virus was first acknowledged as a real problem the major concern was the impact that it might have in referrals to hospitals and the effective swamping of hospital beds, especially those in the Intensive Care Units. At that point in time field hospitals (read Nightingale Hospitals for the UK) were quickly constructed in those countries that did not have sufficient resources and that could end up being overwhelmed. While many of these were stood down over the summer it now seems that with Winter almost upon us in the Northern Hemisphere that the initial fears might actually come true. In the US, many hospitals are almost at full capacity dealing with the regular health issues that society faces as well as the new patients presenting with Covid. And remember, the US is still almost 3 weeks behind the surge that is currently besetting Europe.

What is sometimes overlooked in analysing hospital resources is that it is not just a question of beds. Medical staff at all levels are also a key element of a hospital being able to respond. There are only so many extra hours that key staff can work without exhausting themselves or putting themselves eventually in harm’s way. Hospital management will be where the next major battle in treatment and against deaths will be. And even then, to counter Covid resources will have to be deflected from what are key treatments in cancers and major organ ailments. This is the forgotten story and no doubt some future analysis will look back on Covid times and conclude that some of the Covid deaths would have happened anyway through flu or otherwise while the numbers of cancer and heart related deaths may turn out to have been higher due to lack of access to treatment.

Apart from testing for the Virus there are three other issues that appear to have got conflated. Firstly, there is the testing for Anti-Bodies. This is an “after the event” approach on the basis that if someone was asymptomatic it can provide them with some safety net in terms of immediate infection. This being said, there is not sufficient data yet available from which it can be determined what immunity lifespan will be available from each strain of Covid, of which there now appears to be a few variants.

Secondly, for those that are unlucky enough to be infected and suffer a bad reaction there are some drugs which have been useful on a therapeutic basis. Recently the US Food and Drugs Administration (FDA) approved Gilead Science’s antiviral therapy remdesivir (which is sold under the brand name Veklury) as a treatment for Covid making it the first drug to obtain formal clearance to do so. A far cheaper drug that does not require hospitalisation is Regeneron’s drug “cocktail”, REGN-COV2, which is being used to alleviate symptoms and reduce viral load. Indeed, this was the drug that Donald Trump received when he was infected last month. It’s important to understand that a therapy drug is not a vaccine and is merely a recuperative medication to assist in recovery of those infected. While Veklury hasn’t any track record in reducing deaths from Covid-19 it is not a cheap drug – Gilead charges U.S. hospitals roughly $3,120 per treatment.

Lastly, vaccine design can normally take 6 years + mainly due to the onerous responsibility and possible liability if it goes wrong. The normal creativity of scientists to solve complex medical problems has now been tested to its maximum as they try to come up with a vaccine in a tight time frame. While it is estimated that 150 research teams worldwide started on this journey there are a small number now more advanced so as to give hope that a vaccine will be found. The current frontrunners are:

Name of Vaccine Manufacturer Country Hoped for Date Temperature Requirements
New Crown Sinopharm China Nov 2020 2 – 8 Celsius
CoronaVac Sinovac China Early 2021 2 – 8 Celsius
Ad5-nCoV CanSino Biologics China Early 2021 2 – 8 Celsius
BNT162b1 Pfizer, BioNTech, Fosun USA, Germany, China Q4 2020 -70 Celsius
Sputnik V Gamaleya Research Institute Russia Q4 2020 2 – 8 Celsius
NVX-CoV2372 Novavax USA Dec 2020 2 – 8 Celsius
mRNA-1273 Moderna, NIAID USA Q1 2021 -20 Celsius
AZD-12222 Oxford University, Astra Zeneca UK Early 2021 2 – 8 Celsius

Of this list, Pfizer has hit the headlines and impacted stockmarkets positively in the last week. Nonetheless there is a lot of unknowns in determining a post-vaccine landscape. While markets were upbeat by the efficacy of the Pfizer vaccine the real issue for markets is the challenge that the ever increasing virus cases present as well as the possibility that a Republican Senate (which will hold the upperhand for the next 2 months) will fight for a considerably smaller fiscal package for the US economy, on the assumption that a vaccine will be available relatively soon. This could be a major negative for stockmarkets coming closer to Christmas.

Despite the news on Pfizer, there is a counter movement among the general population of most countries that are expressing an ever growing scepticism as to whether an approved vaccine will be truly safe and effective. Even in Ireland a recent survey, carried out for the Irish Pharmaceutical Healthcare Association, found that one third of respondents were unsure if they would take a Covid-19 vaccine if one became available while 12% said they would not take it. Interestingly younger people was the group most unlikely to take the vaccine.

The Distribution Issues For The Vaccine

Markets in May and June had priced in that a vaccine would be produced by the end of the year but did not focus on how quickly its production would be ramped up or how quickly it could be distributed globally or what population groups would access it first.

After the progress that medical researchers have made to produce a vaccine there is a huge challenge to be faced in the global distribution of the vaccine which might take until the end of 2021 to conclude. As can be seen by the above table of the leading possible vaccine manufacturers, some of these vaccines such as Pfizer’s BNT162b1 and Moderna’s mRNA- 1273 will present transportation and warehousing challenges due to their extremely low temperature requirements. Transportation of any vaccine on such a large scale to as low as minus 70° C is unprecedented in the global logistics  terms.

Where air transportation is needed initial estimates are that more than 8,000 747 Jumbo Freighters would be needed to provide worldwide distribution. This is in addition to servicing the more normal commercial needs of global trade. Even only moving the vaccine within the original country of origin the capacity requirements of temperature-controlled trucks will be considerable.

Apart from the aircraft transportation, the arrival of vaccines at many destination airports, especially in emerging countries, will be a potential cause of concern. Normally, ground handling at airports of pharmaceutical products are high risk points that require high end professional cargo handling and temperature-controlled storage facilities. In Third World countries many airports do not even have such facilities to store large volumes of pharmaceutical products at 2-8° C never mind minus 70 degrees.

Once the vaccine goes out from the destination airport, it will need temperature-controlled trucks to transport the vaccines to specialised storage units and finally to hospitals, pharmacies and GP surgeries. If a vaccine is allowed to thaw out for   too long it becomes unusable and therefore, doubly expensive. Most local medical facilities do not have refrigeration units that can freeze to the depths of minus 70 Celsius and specialist costly equipment will be needed. As a point of reference, the household freezer in your kitchen would normally only go as low as minus 20 degrees.

It is extremely crucial to monitor the vaccines right from the place of origin to the place of distribution and make sure that the quality and integrity of vaccines is well maintained. A particular risk is product security. Since these vaccines will be highly valuable commodities, the risk of theft or loss is substantial at many airports and in onward distribution. Indeed, global police have been investigating organized crime networks and international terrorist organizations that have already supplied counterfeit PPE products. Similar nefarious activities can, and most likely will, take place with either genuine vaccine product or possibly the distribution of fake drugs purporting to be genuine, within national health systems.

The most likely first recipients of a viable vaccine in each country will be health care workers, as well as policing and fire brigade staff followed by high-risk elderly. It is estimated that these groups could account for 35% of a First World population and unless at least three commercial vaccines win approval simultaneously, it’s unlikely enough doses will be available right away. And then there’s the issue of localised immunisation. Pfizer-BioNTech’s vaccine requires 2 shots, given 21 days apart while Moderna’s second shot is delivered at 28 days.

The Economic Outlook

While global brands are noticeable by anyone who travels (or at least did before Covid changed our lives) most of the world’s economic activity in any country is focused on small and medium sized businesses which operate on a local basis. These, in turn, create employment and business for other similar businesses and are at the core of every economy. Covid has impacted most small businesses for the worst while large international technology firms have benefited by leveraging up on their software offerings.

Apart from the obvious losers in the leisure, tourism, physical retail, oil company, airline and bank sectors, businesses    that service these sectors are also suffering badly. Electrical and related contractors, food suppliers, cleaning services to name a few have been under pressure to stay economically viable. Up to now employment by these small businesses was supported by worldwide furloughed arrangements such as Ireland’s PUP – Pandemic Unemployment Payment. With many of these schemes coming to an end, employers who had been long fingering the moment to release staff will now have to deal with the situation.

Number of UK workers made redundant in the three months to September 2020

Source: Office for National Statistics – BBC

In the UK the unemployment rate for the period of July to September was 4.8%, which was an increase of 0.7% over the previous three months. It means that there are now 1.62 million people unemployed. This figure is likely to keep rising as some of the data was gathered in July and August, when infection rates were falling, and large parts of the economy were reopening and before the recent UK shutdown started.

In the US, the fact that the official unemployment figures had not increased significantly in recent months had given hope that the economy there would bounce back – the original “V” shaped recovery. The coming weeks will most likely show growing unemployment and this will make stockmarkets even more nervous. The US is now in the grip of what is no doubt a third wave while Europe is only in its second experience. The reason for the extra wave is the large number of the population who have not worn masks or maintained social distancing routines, mainly on the leadership of Trump. With every lockdown reaction, the threat of long term unemployment looms which will impact small businesses that cannot maintain any hope to remain in business. These trends will not be confined to the UK and US but will be replicated worldwide.

Covid-19 and Financial Markets: And Then There’s Brexit

There are only 7 weeks left until a new trading arrangement must be in place as time runs out on the UK’s  exit from the  EU. While EU officials expected a deal to be struck by mid-November there’s no certainty that anything will happen given the current distraction of the UK government with all things Covid. Assuming a deal is agreed there’s the small matter of making it work physically. Customs Handling software will need to be written and installed throughout the whole freight handling chain. The Association of Freight Software Suppliers has advised the UK’s tax authority, HMRC, that it doesn’t have enough time to redesign the needed software and then test it before December 31st. On top of that there is the issue of the physical infrastructure to avoid long tailbacks in the general port areas in the UK, Ireland and Continental Europe. While over the long term the matter will get resolved expect substantial economic pain over the next 8 months.

Covid-19 and Financial Markets: So Where To Now?

Irrespective of the final outcome of the US elections and, indeed, Brexit negotiations it’s really important to remember that politicians are transitory influences on stockmarkets. Over the passage of time markets price in the good, the bad and the ugly elements of the political environment and their impact on profitability of different sectors of the global economy. Investment on a global scale for most people means that, either deliberately through personal decision or indirectly through their pension funds, they invest in the biggest and best companies in the world rather than political parties. Nonetheless when viewed historically in the US, stockmarkets have had an upward trajectory reflecting increasing profitability through adoption of business improvements brought about by technology. The graph below overlaid by the various Presidents in power shows that no matter who is in charge the long term upward trend will win out.

History has shown that the longer you keep your money invested, the greater the chances of a positive outcome. Staying fully invested through a market cycle has, in the past, ensured investors reap greater rewards over the long-term as rebounds after large losses are often significant.

Throughout your investment journey the markets will experience highs and lows in response to social, political and economic events. Periods of extreme market volatility, such as that which we are experiencing now, can heighten feelings of concern in relation to an individual’s own investments and pension funds, but staying the course and following the five key investment principles outlined below may help you to increase your chances of a positive outcome.

1.  Stay disciplined

Although it may be uncomfortable at times, staying the course and sticking to your strategic financial plan could better serve you in achieving your long-term financial goals.

2.  Volatility is part of investing

Markets rise and fall daily, weekly, monthly – it is part of the natural cycle of investing. But historically, each significant market downturn has been followed by an eventual upswing. A good example happened this year in the US when on Monday, March 23rd 2020, the third-best one-day gain for equities since 1945 for the S&P 500 occurred. The previous best bounces that happened were the two-day rebounds that followed the Black Monday Crash of 1987 and the Lehman Brothers bankruptcy in 2008.

Despite the infamous ‘Black Monday’ of 1987, it was still a positive year in 1987 for equities. Similarly, notwithstanding the last Bull Market being one of the longest on record, we still saw double digit falls in 8 of the 11 years. Furthermore, since 1980, European equities have finished the year in positive territory on 31 of 40 years, yet in each of those years, the market suffered an average intra-year decline of 15.2%.

3.  Keeping your money in cash is not the long-term answer

While markets have recovered somewhat from their lows, they are still in a period of significant volatility and further market falls are still possible. However, monetary and fiscal measures have emerged and there are a range of other potential responses available.

4.  Over the long-term, holding money in riskier assets is rewarded

Short-term market movements are often the result of changes in valuation and sentiment – how investors feel about the stock market. This is in contrast to long-term market movements, which are the result of changes to companies’ fundamental worth.

5. Your Investment Journey Is a Process rather than a one off event.

Regular reviews will ensure you are on track to achieve your long-term, strategic financial goals.

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