Pent-up risk appetite could fuel a prolonged rally, but signposts of a turning point in the spread of the disease may need to emerge first.
It has been clear for some time that COVID-19 is a global problem. What makes it more challenging is that this is not just a healthcare problem; it is a political problem.
As of February 29th, the Center for Disease Control & Prevention (CDC) has announced1 additional cases in the US, totalling 86 in seven states, with two deaths. According to Johns Hopkins University2, worldwide deaths now exceed 3,000, the vast majority in China. However, COVID-19 is now present in every continent and the rate of confirmation of new cases is accelerating, with new epicentres in South Korea, Iran and Italy.
Source: John Hopkins University via Statista, as of February 28, 2020 at 10am CET.
Clearly, we cannot claim to have an authoritative thesis on the likely extent and speed of COVID-19, but we can step back and take in the perspective.
Readiness – is your country prepared?
We know intuitively that governments historically treat pandemics as highly unusual events and (compared to full coverage) typically only invest in their relevant infrastructure to cover ‘an acceptable level of risk’. It is obvious that ‘acceptable’ is a word that means different things to different people at different times. Maybe the relevant question should be, how can we evaluate the readiness of our country’s healthcare infrastructure, faced by COVID-19?
The below chart answers that question, at least to a point. The Global Health Security Index3 is an initiative to benchmark the health security of 195 countries. It is operated by the World Health Organisation’s International Health Regulations (IHR) and Johns Hopkins University.
Source: 2019 Global Health Security Index via Statista.
According to this very prescient index, it is not simply the wealthiest countries that are better prepared. In the Overall scoring, Thailand, South Korea, Malaysia and Brazil all rank above Austria and Italy. In the Early Detection category, South Korea, Brazil, South Africa and Thailand rank above Italy and France. Perhaps most importantly right now, in the Rapid Response category, Thailand, South Korea, Brazil and Malaysia rank above Canada and Denmark.
China may appear to have a surprisingly low score on the table, given that Beijing has been ruthlessly effective at putting the country on a war footing against the virus. The rationale is simply that China’s deficiencies in compliance with international norms such as IHR reporting, are more than compensated for by the country’s high socioeconomic resilience and its strong infrastructure, which allows a hospital to be built in two weeks and cities of 11 million inhabitants to be sealed off. Brute force can be helpful in dealing with an epidemic!
The report4 signals that overall preparedness is woefully low. Even in the high-income countries, the average score is 51.9 out of a possible 100, which clearly leaves a lot to be desired. The principal reason is that although the majority of countries do invest in healthcare security, very few are prepared to spend on gap analysis or on planning. That may change in future, if the current outbreak takes hold of the public imagination.
The capital markets
Over the last week, global financial markets started to quantify the global spread and unsurprisingly, it was expressed in terms of significant falls in capital markets around the world. One of the most common ways to measure this change of investor behaviour is the VIX5 index, which spiked, as can be seen below:
Source: Macrotrends via Statista.
The VIX Index is a score based on the stocks of the top 500 companies in the U.S. market and measures the expectation of volatility over the next 30 days. A score below 10 is considered to be low, while a score above 20 is considered high.
We at Martin Currie are confident that investors who share our long-term approach will probably look back at past events of this type and, whilst recognising the distinctive characteristics of COVID-19, draw conclusions around the patterns of behaviour we tend to see repeated at these times. It is clear that previous events of this nature, such as SARS, were followed by a very sharp rally in all markets. On this occasion, we were contemplating increasing bullishness from international investors when the COVID-19 outbreak happened. Perhaps that means that there will be a more prolonged rally after this one is over, fuelled by pent up risk appetite.
From our vantage point, it would seem that our very selective search for high-quality growth companies typically drives us to take advantage of market weakness to add to our preferred names. My personal view is that on this occasion, I would be looking for signposts that might signal a turning point in the spread of the disease, i.e. a reduction in the daily infections cases, to pull the trigger.
1 Source: Centres for Disease Control and Prevention as at 2 March 2020. https://www.cdc.gov/coronavirus/2019-ncov/cases-in-us.html
2 Source: Statista and Johns Hopkins University as at 3 March 2020 https://www.statista.com/chart/20651/locations-by-number-of-confirmed-wuhancoronavirus-cases/
3 Source: Statista, Johns Hopkins University and World Health Organisation as at 28 February 2020 https://www.statista.com/chart/20629/ability-to-respond-toan-epidemic-or-pandemic/
4 Source: Global Health Security Index and Johns Hopkins University as at 30 September 2019 https://www.ghsindex.org/wp-content/uploads/2019/10/2019-Global-Health-Security-Index.pdf
The Center for Disease Control (CDC) is a section of the US Department of Health and Human Services that researches and monitors the spread of diseases as part of its mission to protect US health security.
COVID-19 is the World Health Organization's official designation of the current coronavirus.
The Global Health Security (GHS) Index is the first comprehensive assessment of global health security capabilities in 195 countries.
A pandemic is the worldwide spread of a new disease.
The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.
Severe acute respiratory syndrome (SARS) is a viral respiratory illness caused by a coronavirus called SARS-associated coronavirus (SARS-CoV). SARS was first reported in Asia in February 2003. The illness spread to more than two dozen countries in North America, South America, Europe, and Asia before the SARS global outbreak of 2003 was contained.
Statista is a German online portal for statistics, which makes data collected by market and opinion research institutes and data derived from the economic sector and official statistics available in English, French, German and Spanish.
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a measure of market expectations of near-term volatility as conveyed by S&P 500 stock index option prices.
The World Health Organization (WHO) is a specialised agency of the United Nations that is concerned with world public health
The World Health Organization’s International Health Regulations (IHR) are a legally binding instrument of international law that aims to assist countries to work together to save lives and livelihoods endangered by the international spread of diseases and other health risks and b avoid unnecessary interference with international trade and travel.