As the number of COVID-19 confirmed cases top one million and fatalities rise above 50,000 worldwide, it is hard to imagine that just one week ago those numbers were just half that. The spread of the virus as measured by officially confirmed cases has been truly exponential (Figure 1). The problem however, is that these numbers are unlikely to capture the full extent of infection. Testing, as we hear so often on the news, has been slow to ramp up to the required pace. The result is that mortality rates are mostly overstated as sampling is biased towards the infirmed. Of course, mobilizing resources against a virus that was unknown just a few months ago is not easy. Neither is drawing firm investment conclusions from the available data. Nonetheless, we present a few threads in this article and will continue to return to these in the following weeks.
The COVID crisis has emerged with alarming speed, and social distancing is likely to have caused a global recession. For the UK, the most likely future path has been mapped by Italy as developments there will provide first indications of success elsewhere.
The data in Figure 1 compares the path of COVID experiences across countries since 22 January this year, when China had recorded just over 500 cases. There was then a six-week gap before the virus became measurable in Europe with a major outbreak recorded in Italy, the European epicenter. Since then, Italy, Spain, Germany, and the USA have all superseded China in terms of measurable cases.
The first thing to note is that the officially recorded Chinese experience appears implausible. For a country with a population of nearly 1.4 billion it has recorded just 84k cases, which is roughly in line with Germany
where the population is just 83 million. Indeed, the way in which statistics have been collected has changed through the year for legitimate reasons. For example, the way in which COVID mortality was recorded in the UK changed earlier this week broadening the definition to include mortality outside hospitals. Assuming that most countries are making similar changes to the way in which statistics are recorded, we can compare experiences across countries however this data should come with their own health warnings.
Figure 3 shows the same data as Figure 2 however, the number of cases are shown on a logged axis (effectively showing the growth rate) and the time line is normalised to a common start point of 500+
cases on 13 March (the first day at which the UK reported more than 500 cases). From this perspective we can map the progress of COVID on normalised basis across all countries.
The clear observation from both charts is the speed and quantum of confirmed cases in the USA. It has been one of the last countries exposed to the crisis, and the one hit hardest based on this data. What becomes clear from Figure 3 however, is the clear overlay of experiences between the UK and Italy. In many ways, Italy is likely to provide the tell tales to this crisis from the UK experience, running between two and three weeks ahead. For what it is worth, we have also included a trend line (dotted) for the Italian experience.
The first conclusion to draw from this data, which is largely based on the Italian and US experience, is that the social distancing measures are likely to remain in force for months rather than the weeks that were initially planned. That is likely to translate into recession, and the early indications are that the quantum of that lost output is likely to be more severe than the last recession experience. The good news, from an investment perspective, is that equity markets are likely to have priced for much of that lost output already. That is not to say that we have seen the equity market lows, we probably have not, just that the longer-term balance of risks are now towards the upside.
There are a few other points to take away from this data. Global experiences have been diverse and the recorded mortality rates vary widely. Therefore, there will be relative investment preferences that
emerge into recovery and these are likely to be tilted away from UK assets. Not only will the government here have to navigate COVID this year, but it has Brexit to contend with too.
We will continue to explore the data and explore the investment opportunities as they present. In the
meantime, please stay safe, and keep your spirits up and do what Baked Potato say!
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