Reopening economies: more haste, less speed Watching for a fresh spike in the curve Mass testing remains an important signpost Markets switch into risk-on mode A key week for central banks
The COVID-19 caseload has now reached almost 3 million infected cases and there have been over 210 000 fatalities. The death toll is on the decline now in Europe and appears to have plateaued in the US, albeit at a high level. As always, we highlight that caution must be taken in interpreting the data in both the time series and the cross section, given the different approaches to measurement and testing across countries.
Exhibit 1
It is important to put the relative success in suppressing the spread of the virus in context. It has been achieved through placing many societies in lockdown. Now, a number of countries are preparing to exit the shutdown. Plans vary from place to place, both in terms of the pace and the extent to which measures are relaxed and the detail available in the public domain.
For example, consider the following:
The motivation for the exits is clear. In the words of Edouard Philippe: “We must protect the French without immobilising the country to the point where it collapses.”
However, there is a real risk of a second wave erupting as the extreme measures are lifted. That is, the caseload could start to rise rapidly again. That may force a cessation of the exit measures at the very least and potentially the re-imposition of stricter measures that would cause renewed economic stress.
Indeed, Jasmina Panovska-Griffiths, a senior research fellow and lecturer in mathematical modelling at University College London, argues that these multiple waves are a characteristic feature of this kind of pandemic.[1]
“The 4 major flu pandemics of the past century – the Spanish flu, Asian flu, 1968-70 Hong Kong flu and swine flu – came in several waves, too. The 1918 Spanish flu pandemic that killed more than 50 million people hit in three waves, with the second killing more people than the first.”
A second wave is not inevitable. Governments can calibrate their exit strategy carefully to control the spread of the population to suppress the spread of the virus. Not every country will be able to relax measures at the same pace.
The capacity of the authorities to conduct diagnostic testing and contact tracing on an industrial scale to catch new cases as they emerge will likely prove a key constraint on exiting any restrictions.
In some cases, it is possible that the virus has already affected enough people that the population is approaching herd immunity, so that the virus can no longer spread easily from person to person. Sweden’s ambassador to the US has claimed that Stockholm may soon approach this situation.
However, the consensus among scientists is that the majority of the population in many countries will need to be exposed to the virus before herd immunity is established. Current estimates suggest that even in the urban hotspots such as New York City, we are far short of herd immunity.
The evolution of new cases and in particular new fatalities in countries which exit lockdown is a key sign-post for the market. The faster those countries can ease the quarantine measures, the sooner they can resuscitate their economies.
With much of the global economy still in lockdown, concerns about a second wave may still be rife among investors, while a vaccine is still elusive.
However, news of falls in the number of new COVID-19 cases and a move towards a relaxation of lockdowns in some countries has given a more optimistic tone to markets over the last week. For example, the US S&P 500 equity index erased roughly half of the loss sustained between 14 February and 23 March. In our view, late March was certainly not the right time to sell risk assets.
Exhibit 2
This week, ending 1 May, is a key week for central banks – the Bank of Japan (BoJ) met on Monday, the Federal Open Market Committee (FOMC) meets today and the ECB on Thursday.
In summary, we believe our set of signposts will become ever more important now that valuations have been reset and there is greater two-way risk.
In terms of asset allocation, we continue to be long market risk strategically. We recently entered an overweight position in European and US investment-grade credit (financed by government bonds) and are long emerging market and UK equities; long commodities and long EM hard currency debt.
However, we also lowered our risk exposure tactically with short positions in the S&P 500 and in eurozone equities ahead of more news on the economic damage caused by the virus and given the risks associated with the exit strategies from lockdowns. We are now waiting patiently for a market setback to increase our risk exposure again in the near future.
Denis Panel, Chief Investment Officer Multi Assets & Quantitative Solutions, and Marina Chernyak, senior economist and coordinator of COVID-19 research.
[1] Also see Coronavirus: when should we lift the lockdown? on https://theconversation.com/coronavirus-when-should-we-lift-the-lockdown-136473
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