Market Thinking

making sense of the narrative

Oxford or Imperial?

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While (still) not being an expert on viruses, we note the difference of opinion between several people that are. In one corner we have the catastrophists from Imperial College London (who as noted in a previous post were the people behind the slash and burn policy of the UK Foot and Mouth outbreak in 2001) and on the other a team from Oxford who believe that more than 50% of the country have the virus already or have had it.

The press of course, catastrophists all, are behind Imperial as are the puritan tendencies demanding ever more stringent restrictions on movement and effective martial law. As a laymen, it makes a change to see genuine difference of scientific opinion, ever since the powers that be decided ‘the science was settled’ on climate change for example, almost no dissent from the catastrophist modelling has been allowed – save if you are even more extreme that is. When you take only one side of an argument and then defer policy making to the scientists, even good science (which is not to say any of this is, or indeed is not) can make for very bad policy.

The only way to settle the argument would be for mass testing, which is some way off yet, but it is interesting to us to note that with today’s announcement that Boris Johnson has the virus, it means that, along with Sophie Trudeau, Prince Charles and Idris Elba, is looks like everyone at the recent Commonwealth conference has contracted it. By everyone of course, we mean everyone tested. It stands to reason that if the virus is as contagious as we are told it is, that the official count of positive tests is likely to be a huge under-estimate and what we are really capturing is the proportion who are sufficiently badly affected (or famous) as to be actually tested. And here, we mean the relatively slow and expensive test for evidence of existing infection, not the cheaper test for antibodies that show who has had it and recovered.

If the count for the denominator is much larger than it appears, then with the same numerator (number of related deaths) we would find the death ‘rate’ meaningfully lower. This is probably one of the reasons that team Imperial has quietly lowered some of its estimates for deaths, even though it compromises some of their policy demands. It is also a reason for some cautious optimism. As soon as we can widely test for Covid-19 antibodies we can identify those that can get back to work while quarantining only those that need it as a form of protection. Widespread testing could also help identify early cases where there is (some) evidence that cheap drugs are actually effective.

None of this is to confuse the need for Intensive Care units and respirators and it is interesting to observe the nationalistic behaviours emerging over this. Of particular interest is the EU, where health systems are very different. It was surprising to hear for example that the French private sector is not being required to help with beds and equipment, equally that the Germans refused licenses to export respirators. Just as with the belief in open borders, the ‘co-operation’ between EU countries appears to have evaporated in the face of the crisis and more than ever the lack of genuine ‘European’ leadership raises a question about the sustainability of the project. When this is all over, the French Gilet Jaunes are not going to disappear, indeed, they are currently rallying under a hashtag of “They knew” (in French) claiming that the French elite knew all about this virus and tested and protected themselves before shutting down the country. Conspiracy theory or not, there is no doubt that the coming months are not going to get any easier for M Macron.

Markets meanwhile had a strong rebound from very oversold conditions following on from the options expiry last week, exaggerated by a lot of margin calls in the derivative markets according to what we are hearing. Some stocks with sound balance sheets and good cash flows rallied by as much as 40%, before a bit of trading profit taking set in. Long term investors looking for yield should definitely be looking, but asset allocators are likely to remain wary for a while yet. Risk levels remain unquestionably high on our models and following downgrades to earnings, many sectors may look cheap, but not outstandingly so. In the US for example, it’s only sectors like consumer stables and communications that are close to the valuation lows seen in q4 2018. Others are well off their highs, but not as cheap as they might at first look.

The consensus now seems to be that there is no need to rush, and that we will retest the lows. Indeed if we look at, for example the end of the dot com crash era, you didn’t have to pick the exact bottom of the S&P on 11 March 2003 of 800, you could have waited a month or so and picked it up at a (less technically risky) 900, which would have stood you in good stead for the run to 1561 in 2007. By the same token, you didn’t have to pick the GFC low of 676 in March 2009, waiting until July would have got you invested -again around 900, ahead of a run to 3380 by end 2019. The risk in both these (and other) occasions however was that people not only didn’t pick the bottom, they missed the next in-price because they were waiting for a re-test of the low. They went from being fearful to being greedy. They don’t ring a bell at the top and they sure don’t ring one at the bottom.

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