Key Insights - Recent Developments

We have all been inundated with negative news flow over the last few weeks. We have been looking for some positives to write about of late, to help everyone’s psyche at present. We have come across some interesting information pieces over the last couple of days and elaborate below.

Bailout

Firstly, it looks increasingly likely that governments around the world are preparing for the largest mobilisation of stimulus we’ve ever seen. With the GFC, governments selected who they saved and who they didn’t, based on those that were essential services / national interest and those that were most responsible leading into the crisis. This time around they’re unlikely to discriminate as no one could have foreseen the economic impacts of the virus. Whilst we can’t say for sure everyone will be saved, recent information flow indicates that governments are preparing packages in the billions and trillions of dollars, which will be financed via debt with little to no recourse. That debt will be purchased by central banks who will need to print more money than ever before. Any non-performing loans are likely to be absorbed by the government and segregated / ring-fenced, with the debt either forgiven or worked out over the very long term. Hopefully governments get their act together and get this legislated as soon as possible. There is probably no point waiting and no point trying to figure out where it lands - perhaps go hard or go home. The main negative here is the US, where the Democrats are holding up President Trump’s US$2 trillion plus stimulus package on the basis they want to control who gets it. Now is not the time to be quibbling on who gets what. Get it out into the economy and then decide on whether more is needed. Somewhat surprisingly, the lead has been Germany, who before the virus was maintaining a budget surplus even though their economy was in recession. They have put forward a huge package pushing them into significant deficit for the foreseeable future.

Secondly, the US central bank announced last night that they will do whatever it takes to save the economy and those in it. The technical aspect is that they will buy US government bonds and mortgage-backed securities in unlimited amounts, effectively back-stopping both markets and providing unlimited liquidity. It has also set up a program to ensure credit flows to the private sector and state / local governments. The European central bank has stepped into the European corporate bond market and is buying $1-2 billion euros of corporate bonds a day, and will likely increase this over the coming days and weeks, potentially up to $6-7 billion euros per day. These same moves will need to be adopted by central banks globally, specifically the RBA, British, and Japanese central banks. Most importantly, the moves push money into the system incredibly swiftly and allow bond markets to normalise. Once bond markets normalise, all other asset markets can begin to normalise.

A recent note from PIMCO, the world’s largest active bond manager, and a few other sources have confirmed the above.

This is not to say that equity markets won’t incur continued volatility. Many companies will be forced to raise equity for cashflow needs, before which, governments and central banks may step in to back-stop them if required.

Containment

In an incredibly insightful, but deeply technical piece from Chris Joye (fund manager) and the data science team at Smarter Money Investments, they’ve modelled the virus spread, peak, and decline based on data from each country around the world and based on each country’s response to the virus. What this shows is that if the US had South Korea’s efficiency in dealing with the virus (very efficient), then the US’s peak would be this week. That efficiency is unlikely, so if we assume more likely scenarios like 50% of South Korea’s efficiency, then we’re looking at peak contraction in the first week of April, or mid-April at the worst if we adopt 75-100% of Italy’s efficiency (very inefficient). To apply those same assumptions to Australia (i.e. 50% of South Korea’s efficiency) would have us at peak cases around mid-April, with a decline in cases observed in the second half of April. There is the risk that governments and their citizens don’t act as they should, which may extend the time to peak cases. Now is the time for all of us to be smart and sensible.

Cure and Potential Vaccine

One can trawl through medical journals and updates to get a clearer picture on what is being done / tried / tested on the front line. What’s been incredibly pleasing to see is the efficiency and speed at which those on the front line have been moving, without government bureaucracy, to develop a cure and vaccine. A vaccine may potentially be near, but vaccines are problematic in that they must pass rigorous and lengthy testing before commencing completely new production. Timeframes expected here may be lengthy at present. However, on the cure front, doctors on the frontline in France, Germany, and the US have already begun treating their patients with two drugs approved for other uses and in production. These two drugs are anti-malaria drug chloroquine, it’s safer cousin hydroxychloroquine which is used to treat auto-immune disease and arthritis, and azithromycin which is an upper respiratory antibiotic used to treat things like legionnaire’s disease.

It looks like hydroxychloroquine kills the virus whilst the antibiotic has viral responses which help the lungs and respiratory tract to heal. In France, the drugs were tested on patients with the virus with incredible outcomes – those that took both drugs were all cured by day 6 of treatment; 57% of those treated with hydroxychloroquine were cured whilst the rest improved but took longer to cure; and 12.5% of patients who received neither were cured by general care. Most patients globally treated with this combination have cleared the virus in 3-6 days versus the 20 days it takes for those who receive hospitalised care. The quicker clearance obviously means less time the patient has to spread the disease. Critically, the most important takeout is test and test widely, and then use this treatment combination early (i.e. not waiting until a patient is on a ventilator and has already experienced damage to the lungs). The only side-effect to note is that hydroxychloroquine can be risky for those with heart disease/issues.

Both drugs are readily available, but now in low supply given they’re used for regular treatment, so a ramp up of production will be required. Drug companies have committed to ramping up production, but more will be needed. Also interesting to note on the vaccine front, is that a doctor in the US has been using hydroxychloroquine as a preventative of sorts to protect healthcare workers from infection.

Overall, containment of the virus is still required, as the drugs alone won’t fix this. The stats showing new cases are incredibly concerning as the virus moves to peak in many countries globally and containment is still in its early days yet. What’s critical next is that the number of new cases starts to decline each day, as does the number of active and critical cases (remembering that approximately 5% of all cases globally are serious or critical), so that hospitals can better cope regarding available beds and ICU equipment.

Hopefully this provides some optimism to balance out the pessimism we’ve all been seeing, reading, and experiencing. There is light at the end of the tunnel.

We’re not saying we are there yet, but we hope we’re getting closer.

From a portfolio perspective, we would encourage the following right now:

1. Don’t make any rash portfolio changes – now is not the time to be selling.
2. Be sensible about putting excess cash to work – take into account things like investment time horizon and risk appetite / tolerance, and consider doing this periodically, averaging into the market over time (subject to change depending on daily information flow). 

As always, look after yourself and those close to you. Call us anytime to discuss your financial strategy or investments.