Dave Mohr | Chief Investment Strategist | Old Mutual Wealth | mail me |
Izak Odendaal | Investment Strategist | Old Mutual Wealth | mail me |
Soviet dictator Joseph Stalin infamously noted that while a single death is a tragedy, a million deaths is simply a statistic. That grim milestone has now been passed by the coronavirus. It has claimed more than a million lives worldwide.
In South Africa, more than 19,000 people are known to have died from COVID-19. Amid the flood of coronavirus-related statistics, we should never forget that each number on every dashboard or report – in this note too – refers to a human being with hopes, fears, memories and loved ones.
A resurgence in COVID-19 cases in many parts of the world is therefore of great concern, not only because of the lives at risk, but also because of the renewed threat to livelihoods.
Restrictions on movement and activity are being increased across Europe. Although they are not on the scale of the lockdowns experienced earlier in the year, they will still negatively impact many service sectors.
A second wave?
There is some debate as to whether we are dealing with a second wave, or a continuation of the first. A few European countries that were hard hit earlier this year, especially Spain and Belgium, are under strain again.
In other cases, countries and regions that escaped the earlier wave are now under huge pressure. That is particularly true of the Czech Republic and other Eastern European countries that initially imposed lockdowns that were successful, but clearly not sustained.
In the US, there have been three distinct waves of new confirmed cases, but each time concentrated on a different region. Initially it was the coasts (especially New York), then the sunny Southern states, while now it is the Midwest that is bearing the brunt.
Chart 1: New Covid-19 cases in the US and selected European countries
Source: Refinitiv Datastream
The good news is that so far deaths and hospitalisations are still well below the March and April levels for most affected regions. This is crucial, as the initial lockdowns were instituted to prevent the health system from being completely overloaded.
However, as with so much else concerning this virus, it is not clear exactly why. It could be due to more effective treatments, that younger segments of the population are now being infected, or that the virus’s ongoing mutations has rendered it less potent.
The other plausible argument is simply that the initial wave was much worse than we imagined, and that limited testing severely undercounted the number of infected individuals.
The economics of waves
It is also not clear whether we’ll ever know exactly what happened, but it is up to the scientists to figure it out. As investors, our responsibility is to try to understand how the economy and markets could be impacted. There are at least four points to consider.
Firstly, authorities are clearly reluctant to return to hard lockdowns, especially as their effectiveness is still under debate. Earlier this year, locking down seemed like the best option given how little was known about the virus.
Now, governments are taking a much more nuanced approach, guided (hopefully) by better data and more insight. We know, for instance, that keeping schools open is much less risky than initially thought, but that nightclubs and bars are probably worse.
The second point is that government restrictions were only part of the reason for the global contraction in the first half of the year. The International Monetary Fund’s army of PhD economists have crunched the numbers and determined that the consumer reaction contributed as much as the government restrictions.
In other words, consumers could spend, but chose not to. This means that the way consumers react to the second wave is as important as how governments respond.
This brings us to the third point. The rapid spread of the virus in the early months of this year came as a complete shock. Fear was palpable everywhere.
In South Africa today, there is a sense of coronavirus fatigue even though the average daily infection rate here is currently 10 times higher than in April. This keenness to be out and about could of course lead to a surge in infections, but it also suggests consumers are not going to be as spooked as they were earlier in the year.
That doesn’t mean that changes to spending patterns will be reversed. In the UK, for instance, internet sales jumped from 20% of total retail sales to 34% during lockdown, but remains elevated at 28%.
It also seems unlikely that there will ever be a full return to the daily commute to a 9-to-5 day at the office. This will change spending habits, and there will be winners (suburban real estate) and losers (office catering).
Many people have adapted to a new way of working, shopping and entertaining themselves and similarly businesses have adapted to serve those needs. Some business models might never recover, while others have received a permanent boost.
Fourthly, whatever happens with the virus outbreak – and it clearly remains subject to huge uncertainty – markets are unlikely to crash as they did in March. The virus no longer has shock value and we are not dealing with an unknown entity.
Moreover, investors know that central banks continue to stand behind the financial system and further, massive fiscal policy support is likely. This does not preclude episodes of volatility, but it is unlikely that the virus will result in asset classes collapsing in a heap again.
China’s V-shaped recovery
A handful of countries managed to get the virus under control quickly and have snuffed out any fresh outbreaks. New Zealand is one such country, and it just rewarded Jacinda Ardern with another term of office for her calm and competent management of the crisis.
Another, where they don’t really bother with such niceties as elections, is China. Although China initially bungled the response to the outbreak in Wuhan, largely due to local officials afraid of upsetting the apple cart, it eventually acted decisively.
Apart from quarantining Wuhan and other cities, it also rolled out extensive testing. It worked. Not only does it have the virus under control, but its economy quickly sprang back to life. New data shows that the economy grew by 4.9% year-on-year in the third quarter in real terms.
While there is always some scepticism over Chinese economic statistics, there is no doubt that the economic activity has jumped back. Apart from the economic benefit of containing the outbreak, the government also acted swiftly to support the economy.
In doing so, it fell back on the old playbook of opening the credit taps and boosting fixed investment. China’s factories also benefited from increased global demand for personal protective equipment as well as laptops and electronics.
By contrast, western governments focused on providing income support to households either through direct transfers or measures to help companies keep layoffs to a minimum.
The net result is that Chinese industrial production was 7% higher than a year ago in September, while retail sales were only 3% higher. This is almost the mirror image of the US, for instance, where consumer spending rebounded quickly while factory output still lags.
This raises questions about China’s long-term strategy of rebalancing the economy away from a reliance on debt, investment and exports towards domestic consumption and services. The coronavirus interrupted this trend, but probably hasn’t derailed it.
The Central Committee of the Communist Party is expected to outline its latest five-year plan later this month, with a renewed focus on supporting balanced growth.
The events of the past three years – Donald Trump’s trade wars and the coronavirus – will have highlighted the importance of greater self-sufficiency.
By all accounts this will require ongoing reform to open up the economy further to market discipline, but political control will remain firmly with the Communist Party and President Xi at its helm.
For all the talk of ‘decoupling’ from the rest of the world, China has increasingly allowed foreign participation, most notably in financial services. Capital is flooding in, chasing higher yields and faster growth than available anywhere in the developed world. The yuan has rallied to a two-year high.
The race to net zero
One other notable, if underreported, shift was the recent announcement from President Xi that China’s carbon emissions would peak by 2030 and reduce to net zero by 2060. This is significant, since China is the world’s largest emitter of CO2.
Achieving this will require a massive shift in the way it produces and consumes energy. This implies rapid growth in wind and solar energy and electric vehicles among other things.
These need to be built, and much of the raw materials will have to be sourced from outside China. The mix of commodities China imports will therefore change, but overall demand should stay robust.
This is of course where South Africa can benefit. It is unlikely to be anything like the 2002 to 2011 boom where expectations ran well ahead of reality and prices ended up crashing back down to earth.
Chart 2: South African COVID-19 cases and tests
Source: Refinitiv Datastream
Keeping balance
Meanwhile, we too will have to focus on keeping the virus under control locally. There are increasing concerns over a second wave here, but so far the numbers don’t show it.
Since testing can be erratic, it is best to look at seven-day averages of positive tests. The number of tests conducted can also change over time. If we’re seeing more cases, it might simply be that more tests are being conducted.
Therefore one should also consider the number of tests that indicate a positive result. Both the number of confirmed cases and the percentage of positive tests have remained broadly stable at a national level.
However, the exponential nature of epidemics means this can change quickly, and we all need to maintain vigilance, wear masks and avoid crowded spaces.
Chart 3: Emerging market currencies and the rand
Source: Refinitiv Datastream
South African markets therefore continue to follow global developments. The rand’s recent perkiness is not because of optimism over this week’s Medium Term Budget or local coronavirus cases, but because emerging market currencies have rallied collectively.
The US election and the possibility of a ‘blue wave’ Democratic Party sweep remains top-of-mind for global investors as it is likely to result in a surge of US government spending that will provide a boost to the economy. Of course investors are also closely monitoring the second wave of COVID-19 cases.
As any surfer will tell you, riding waves is all about balance. You also need to be in the water to catch the waves. These are useful thoughts to apply to investments too.
