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Release Date: 25th February 2020
Dear Reader,
I have been quite obsessively following developments on Covid19 during the last few weeks, devoting quite a lot of my time to it.
[Sharing with you a very useful link where you could access varied expert opinions in one place]
When you think of concepts like the 80:20 rule and in particular focusing on the one thing that really matters, it feels like this is the “Big One” to figure out, because the potential impacts are huge.
In my view, figuring out Covid19 and its impacts, is right now far more important than figuring out normal economic numbers such as what happened to the Trade Deficit or developments like what happened with the budget bill, or even what might or might not happen in the coming elections.
Is this Disease X of the medical world and is this the cause of the next global economic shock?
In medical terms, the question would be “Is this Disease X that the WHO warned us about, or in historic circumstances, something like the Spanish Flu of 1918 again?”
Or is this the Big One in terms of being the catalyst to the kind of financial and economic shock we saw in the 2008 global financial crisis - even if the medical impact will not be comparable in any sense to the Spanish Flu?
Right now, it really feels that way. Even while peak interest locally seems to have reduced, based on what’s been happening during the most recent days, it has become a much more global issue, spreading well beyond China. [Read Covid-19 goes global]
My view, reading what’s been said, is that we have moved beyond the “containment phase” and many countries now need to fully prepare for the “mitigation phase”. This opens up a lot more economic impacts than just seeing it as a “China issue”. It is likely going to be hard to stop a global spread of this nature and many, if not most countries, could become like China in terms of how widely it spreads. The fast spread in Japan, South Korea, and Italy is an early indication of what that might look like.
Despite all the above, there are still ways that it might not end up being so bad. These are the questions to which we need positive answers, to come to a situation where the actual impact is much less:
1. What is the actual infection rate?
There are some views that the actual infection rates are much higher than reported and that most people who get it are not very symptomatic. While it might be counter intuitive that a higher number of infections is a good thing, if this is true, what it would tell you is that the “mortality rates” and “% of critical cases that need intensive medical attention before being saved” are much lower than what’s being reported, and then this becomes closer to a new “Flu” or something similar to H1N1.
2. Will the heat stop it from becoming a big problem in Sri Lanka?
“However, multiple researches show that there is a correlation between the deadly virus and changing temperatures. The novel coronavirus becomes increasingly ineffective with a rise in temperature and is more effective in lower temperatures. As temperatures start to rise in India [and Sri Lanka] due to the onset of the summer, the country is likely to be relatively safer from the deadly grip of the virus.”
3. Will modern medicine and tech help us deal with it much better?
Even if it gets bad, modern technology, modern medicine, or better treatment protocols is likely to make this much less dangerous in the end, and as we grow to understand the disease, we will deal with it much better.
4. Will very strong movement restrictions and contact tracing work within countries keep it much more contained?
There are some views that the very severe movement restrictions like China has instituted, or aggressive contact tracing and individual quarantines like Singapore has done, could successfully mitigate the spread of the disease.
This has a chart of how China has really contained it outside of Wuhan - Fed minutes buoy market sentiment
And if you are interested, this shows how Singapore has dealt with it once the disease starts spreading locally, with its approach being referred to as Gold Standard for others to follow - One month of COVID-19: Concern, containment and collective effort
However, even if the efforts of both Singapore and China to contain the disease are successful in handling the disease, they have very significant economic impacts. South Korea too has started to see a similar big impact on the economy - Citi says fear of coronavirus in South Korea is spreading ‘at a much faster rate’ than the virus itself
Given all this, what can you do?
It’s not an easy answer to give but I am guided by this quote by Howard Marks :
“You can’t predict. You can prepare
…Now, it sounds like an oxymoron because how can you prepare if you can’t predict? But the answer is we never know what’s going to happen, but we can consider the likely scenarios and prepare for some of them. By definition, you can’t prepare for every eventuality.”
In this situation, given that tolerance for risk is different, the preparation would be different from individual to individual and company to company. It is better to ask yourself questions that are most appropriate/applicable to you and your work environment, and come up with the answers.
What would you do if it’s not just the supply chain from China that gets disrupted, but disruption comes from anywhere around the world?
If the disease mitigation results in much greater need for work from home as cities like Singapore and Hong Kong have seen, how would you prepare and train for it now (in person), so if the need arises you can work as effectively as you are in your workplace?
In terms of the Economy and markets, while we can see positive second order effects for Sri Lanka if things get worse i.e. lower oil and commodity prices benefiting the BOP, lower global interest rates helping re-finance debt and both of these helping with local rates/the LKR, it is a very risky time. So, we think, in general, taking a very defensive position in markets at the moment is more appropriate. One way to look at it as an investor is “How would you prepare if something as big as the Global Financial Crisis of 2008 was to repeat in the future, but you don’t really know how exactly it will impact different asset classes?”
What would your playbook be? Be ready to implement it.
It is of course a confusing time, but I leave you with this quote from Nassim Taleb, author of the Black Swan.
“Understanding how to act under conditions of incomplete information is the highest and most urgent human pursuit.”
Hope this overall perspective helped.
Thanks,
Amal