24th August 2020
We have toiled throughout the Spring and Summer to get rid of this virus. We’ve thrown vast sums of money, our brightest scientists and our courageous healthcare workers onto the problem. We’ve hidden in our homes, cancelled our holidays, masked our faces and even (at the insistence of Boris Johnson) pledged to get rid of any additional weight. But still it is here.
More than that it is proving that even when beaten back it has an ability to pop up elsewhere. The past weeks have seen a resurgence of the virus in Europe even as it is finally abating in the United States.
Stock-markets are still feeling the impact of the ebbs and flows of this virus profoundly. Days when there is good news lead to significant rallies. This Monday US President Donald Trump announced the approval of convalescent plasma as a treatment. It is hardly a breakthrough moment. The early evidence is that there is some effect from the plasma but that it is not profound. More to the point you only have as much plasma as you have sick patients, so it is not really a long-term solution. But still the market rose.
In fact, whilst we remain focused on the hopes of a breakthrough treatment the more encouraging story of the past month is perhaps that whilst cases have surged deaths have not. This, say doctors, is less about single breakthrough treatments and more about the medical professionals having got progressively better at making good clinical decisions. There are other potential causes such as the infections now being more associated with younger healthier people. Nonetheless there is early evidence that the overall mortality rate has fallen significantly.
There is also one early but tantalizing piece of real academic evidence emerging from Singapore which suggests the virus itself may be weakening. Whilst it is common to fear the virus will get worse, we should remember that this conveys no evolutionary benefit to the virus. It can grow much faster if it is a mild rather than a severe infection. For this reason, over the long-term the evidence suggests that mutations are likely to weaken the disease.
Of course, we do not know the future. We cannot be sure that death rates will remain this low, or that the virus can weaken. However, we can conclude that it now seems probable rather than possible that the world will not need to return to the economically devastating full lockdowns of the Spring.
For this reason, we believe that some modest economic expansion can continue in the months ahead.
However, we should not be naïve about the shape of that recovery. The easy recovery has now happened. Growth from here will be hard to attain and will come in the context of rising unemployment in the UK and Europe where job protection schemes were coming to an end. It will also come alongside mounting pressure on Governments to tackle the ballooning debt we are accumulating.
For these reasons, our core view is that equity markets can continue to grind sideways and perhaps make some modest progress in the months ahead. We are constantly asked whether stock-markets could drop again to their March lows. Of course, there is no way of being sure but our view is that this is unlikely. That crisis came both as the virus hit and as it triggered a financial crisis. The actions of central banks and the support they now provide mean that a new financial crisis is not a material risk. For this reason, we expect any future volatility to be significantly more mild in nature.
In the context of a gradually improving economic environment it seems unlikely that the world’s central banks will opt for additional radical interventions that could lead to sharp share price rises. For this reason, we remain invested in the higher quality growth companies that can thrive in difficult times.
But we watch carefully for news on a vaccine that could meaningfully change this picture. We must remember that Donald Trump could choose to claim victory on the vaccine long before the scientists are ready to, in order to boost his flagging electoral chances in November.
Surely, he wouldn’t do that you say, actually claim a vaccine works before we know it does? Well in the past months he has sought to delay the election, close polling stations, de-fund the postal service that is to deliver ballots and suggest he may send armed Federal agents to polling stations. So yes, he very well might do that.
Whilst the international scientific community would be incessant with rage at the approval of a vaccine before Phase III trials are fully complete Trump may well conclude (as Russia’s Vladimir Putin did) that it is a political gamble worth making. After all, if we have learned one thing about Donald Trump it is that he will do what is in his own personal interests. As he is now close to 10 points behind in the polls a gamble may well be the right thing for him, if not the wider world.
We should be clear that a pre-emptive approval of the Oxford/AstraZeneca vaccine in the United States ahead of the election could well lead to sharp stock-market gains.
In the mean-time caution remains the order of the day.
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