At the start of the year we assumed that the biggest rise in market uncertainty would be due to US politics and that this would begin with the Democratic Primaries. While it is very unusual for US Presidents not to get a second term (George Bush Snr being the most recent, before that Jimmy Carter and prior to that Herbert Hoover) this has not of course been a usual first term for President Bush. Just as losers’ consent was withheld by those opposing the UK referendum result for three and a half years, so it has been with the Never Trump wing of the Democratic Party who have been trying to remove him from office ever since he took it. This has created a feeling in some quarters that the next President will be the Democratic Candidate and thus these Primaries are as important as for a first term President, even though on all other measures this remains Trump’s to lose.
In terms of front runners, the conspiracy theorists are now saying that Joe Biden was only ever useful as a peg to hang an impeachment on (it was the fact that Biden was a potential Presidential rival that was the justification) and that now the impeachment is quashed, his candidacy is no longer ‘needed’. He certainly seems to be fading as fast as ‘low energy Jeb’* Bush did last time, which is creating something of a Dem Panic among establishment Democrats, as Bernie Saunders is energising the vocal socialist base in a manner similar to Jeremy Corbyn in the UK. Markets will be watching their Bloomberg screens for updates on ‘Little Mike’* Bloomberg’s delayed start to a campaign for establishment Democrats, but need to remember that just because his name has been on their screen their entire career, outside of New York, where he was mayor, no-one has heard of him.
*Trump’s skills as a playground bully are manifest in the cruel but memorable nicknames he gives to his rivals.
In our view the actual risk to markets remains that Trump adopts some Democratic sound bytes as a campaign tactic to undermine them and in doing so rattles market confidence. For example, he has never been a fan of big Pharma, or Wall Street – especially Private Equity – and his populist instincts may extend to bashing overpaid CEOs, or restricting routes to making them rich such as share options and buy backs. Meanwhile, we know he is not a fan of big tech. Any of these ideas introduced as a way of stealing Democrat’s more popular policies could undermine the sectors currently relaxed that their biggest perceived threat, Elizabeth Warren, in now trailing.
Except of course, all this Dem Panic has been over-shadowed by the Pan Demic that is the Corona Virus, something we have discussed on here already. Right now, the real issue (for markets certainly) is the response to the virus more than the virus itself. Imagine the reaction in the current environment to a headline “Deadly flu virus kills thousands of US citizens” and yet that is what happens. Every year. If we look at the latest figures from the US CDC, there were an estimated 19 million flu cases in the US last year with 180,000 hospitalised, of which 10,000 people died. Sure, we have vaccines, but there is no mass panic, no quarantine and the 6% mortality rate for those hospitalised is currently three times that of the Corona virus. Indeed, for normal flu the death for those hospitalised can be as high as 17%. Again for context, 1.5million people die of TB every year.
The already confused situation has been made worse overnight by the announcement in China that there have been more cases than previously acknowledged due to a change in measurement. This has naturally triggered the conspiracy theorists (those not already focussing on Democratic policies anyway) that China is ‘not telling us what is going on’. By including those suspected of being, rather than just those confirmed to have been, exposed to the virus, the official death toll has risen to 1368 out of 60,000 infected. This is thus still around the 2% mortality rate we have seen so far and remains far below that of SARS or the lesser known but far more deadly MERS. We do however need to see the rate of growth of new infections to start to decline.
So far, 99% of all cases are in mainland China, with ironically Hong Kong suffering less that it would have done due to a relatively porous border on account of the protests last year meaning far fewer tourists have been coming over Chinese New Year. However, Hong Kong’s response has been almost as dramatic as mainland China. There is no quarantine per se, but schools are closed, little or no business is being done and there is a panic run on almost everything, especially facemasks. The latter is despite advice almost everywhere else that a mask is to stop you infecting someone else, it does not protect you from infection. The almost tragic-comic side issue is that there is a huge shortage of toilet rolls as apparently the paper is being use for masks and this is turning into a more general siege mentality. The Hong Kong sevens have even be postponed.
As a validation of the old adage “It’s better to be lucky than good” I had actually relocated to the French Alps at the beginning of January for a few months so find myself outside of the panic zone, but with companies imposing travel bans and quarantines and schools insisting that any pupils travelling to and from not just China but increasingly other parts of Asia be quarantined on return, the impact on economic activity has been harsh and Hong Kong is reportedly ‘a ghost town’. Companies unable to ride out a period of weak cash flow will fold or get taken over.
On the flip side, we note firms like Ant Financial are reporting record activity as people are stuck ‘working from home’. Interesting to note of course that Jack Ma of Ant Financial owner AliBaba often attributes some of the early success of AliBaba to the stay at home aspects surrounding SARS. With people forced to stay in, using Apps to work from home, as well as play video games, watch Netflix and ordering deliveroo or Uber Eats, we may see a similar enhanced adoption of cyber living as a long term consequence of this Pan(dem)ic
