I. Medical Breakthrough
In breaking news, French Doctor and microbiologist Didier Raoult and his research group have released a Paper showing a drug combination making a breakthrough with COVID-19 hospital cases i.e. the severe cases.
A combination of hydroxychloroquine (anti-malarial) and azithromycin (effective atypical antibiotic especially for travellers’ diarrhoea, pneumonia and chlamydia) is effective for COVID-19.
Graph -grey line is remaining infected patients
This is the paper:
“In conclusion, we confirm the efficacy of hydroxychloroquine associated with azithromycin in the treatment of COVID-19 and its potential effectiveness in the early impairment of contagiousness.
Given the urgent therapeutic need to manage this disease with effective and safe drugs and given the negligible cost of both hydroxychloroquine and azithromycin, we believe that other teams should urgently evaluate this therapeutic strategy both to avoid the spread of the disease and to treat patients before severe irreversible respiratory complications take hold.“
There are some clinical reservations that the two drugs taken together could increase the risk of toxicity to the heart. However the study appears to identify and handle those patients so identified.
Didier Raoult is somewhat controversial, although his Wikipedia Bio is impressive. The petty fighting among scientists is not helpful. Your diarist keeps thinking if COVID-19 can be rendered ineffective with soap because it breaches the cell wall, that scientifically this can’t be beyond current science to solve. Whether it is Raoult, Gilead’s Remdesivir drug which was successful on US citizens from Diamond Princess in Japan or serum work in USA (similar to polio method), modern science will nail this.
A flood of quick testing kits for COVID-19 from all around the world have received approval in the past fortnight.
II. Understanding of COVID-19
With everyone, we have learnt much about this pandemic since the last special edition Blog a fortnight ago. Current status is countries fall into two categories: those that adopt the Singapore solution (Singapore, China, several Asian countries but not Indonesia) and those that don’t adopt the Singapore solution (Italy, Iran).
The Singapore solution has three limbs: a) COVID-19 cases quarantined at home or in a government arranged facility b) serious cases in hospital with drugs c) testing continually to separate the sick from the well.
So in Singapore, restaurants and offices, bars and shops are open. But whenever one leaves an office building, there is a temperature test to get back into the building or shopping mall, sometimes up to four times per day.
Australia on Friday continued its move towards adopting the Singapore solution by quarantining overseas travellers in hotels, Rottnest etc. But GPs require test kits to diagnose flu v COVID-19. These are coming, with the identification of COVID-19 cases essential, so that the real economy can start to relax some restrictions and re open some businesses. We have 14 dead in Australia, two in QLD, and three in ICU. In contrast business has ground to a halt and large sections of the population in panic mode. Once we devote our resources to identifying the sick, then the restrictions can come off those able to keep the economy going.
With more testing, the number of cases will increase, because previously we only had the capacity to test those returning from overseas and those who came in contact with them. But early identification and the drugs available should result in number of deaths remaining low. Peak cases may be mid-April if the Australian and State Governments continue to move to the Singapore solution.
Overseas in the USA, New York will be the worst. They have tools now that they didn’t a week ago. If the virus is stopped before it becomes Acute Respiratory Distress Syndrome, it’s just a serious flu. But the really sick people passed that point a week ago and now have major organ failure.
III. Economic Impact
The cure is more dangerous than the disease in Australia currently. That fear is understandable given the Italian experience. The breaking news should mean that the pessimistic 6-12 month business shutdown starts to be relaxed much sooner. Once there is understanding that the Singapore solution works and of the testing and drugs available, the needle should move back from disaster towards severe impact.
Travel businesses won’t recover until a vaccine is available, likely late 2020 or early 2021 IF the University of Queensland vaccine program or one of the others around the world make it. Businesses currently open can hopefully keep going all the way through. The real concern are those currently shut, with business owners losing, in some cases all their capital. But that is also the opportunity. There should be no reason the property industry, horse racing, football, shops, restaurants aren’t able to re-open in 1-2 months. IF we can re-open a major part of the economy, Australia may not have a depression, but rather a shorter recession. That must be the objective of policy makers.
Moody’s 25 March 2020 Global Macro Outlook 2020-21 note that the coronavirus will cause unprecedented shock to the global economy. Revising growth forecast down, G-20 real GDP is expected to contract by 0.5% followed by a pickup in growth to 3.2% in 2021. In November last year, before the emergence of the coronavirus, G-20 economies were expected to grow by 2.6% in 2020. Notwithstanding major support from fiscal and monetary policies, downside risks to growth remain sizable. The severe compression in demand over the next two to four months will likely be unprecedented.
Moody’s see business activity will likely fall sharply across advanced economies in the first half of 2020. Moody’s project cumulative contraction over the first and second quarters of 2020 of 5.4% in Germany, 4.5% in Italy, 4.3% in USA, 3.9% in UK and 3.5% in France. This output loss in the second quarter is unlikely to be recovered.
Moody’s forecast China real GDP growth of 3.3% in 2020, followed by 6.0% in 2021.
Elsewhere the recovery in other emerging markets will likely be relatively more muted. A general lack of social safety nets, a weaker ability to provide adequate support to businesses and households, and. Inherent weakness in many of the major emerging market countries will amplify the impact of the shock.
Exchange rates are an issue, as they were during the GFC. The $A is not a strong currency as we have the US disease i.e. Australians spend too much on consumption and don’t save enough. The $A is a commodities currency. China continuing to buy our commodities is very important. Like in the GFC, the most likely scenario is overseas markets will recover and so will our Australian dollar. So hedging is important. We are looking at rolling some existing international funds into a hedged version where available.
IV. Market Strategy
The mid-March Blog a fortnight ago commented as follows:
“After a crash of almost 10 per cent on Wall Street on Thursday 12 March 2020, Australia’s S&P/ASX 200 share index fell a further 431 points or 8.1 per cent to a four year low of 4873, before recovering 13.7 per cent from the low to finish up 4.4 per cent at 5539 - its best intraday bounce on record.
It was an extraordinary two days and an event one only sees a few times in one’s life.
At its low point, the S&P/ASX 200 had fallen 32 per cent from a record high of 7162 in just three weeks, having experienced its fastest shift from bull to bear market in recent history.
So we now know what the market reaction to a global pandemic looks like in the first three weeks. Prior to this, the Australian market had treaded water from 1 July to mid October 2019 and then managed a modest 2.5 per cent rise to 31 December.”
Monday 16 March reversed the recovery on the previous Friday and after further volatility, Monday 23 March saw stock prices at lows many in our office never thought we would see. With the US late to adopt the Singapore solution and Australian news in full panic mode, we thought this coming week might form an excellent entry point. Whether it be this week or not, the Breaking news should see the market as a leading indicator bottom. If it continues to be volatile until the double derivative ie the rate of change of COVID-19 cases peaks, then on the above analysis, that should be during April 2020.
USA stock markets were at full value prior to COVID-19 and late to adopt Singapore solution - in fact still only partly adopted. So the number of cases will continue to grow. Generally we are waiting for the double derivative on new cases to fall before committing major funds to overseas markets.
However, there has been some exceptional buying. In Australia Wesfarmers fell from $44 to low $30’s. Officeworks are busy with many working from home requiring office supplies and being at home stimulates demand for Bunnings. Bunnings is based on the Home Depot model in the USA. Home Depot is a fabulous business -roe 35%, own 80% of their stores, low debt. Stock fell from $US250 to under $US160. Since recovered to $190, but may get another opportunity this coming week.
Burrell Focus list with defensive earnings has proven useful. For example Amcor packages those goods in the grocery stores. $10 last Wednesday, $11 Thursday, $12-13 Friday.
There will be a number of stocks whose businesses are badly impacted. But is there another listed company not so impacted, which has not fallen so far, so a switch is worth considering. Or is the market too sanguine on USA logistics disruption e.g. Brambles and has not corrected much, so funds better deployed where a larger discount is on offer. So far we have avoided stocks whose businesses have high debt or whose businesses are right in the gun e.g. tourism and travel. Most businesses will have an element of adverse impact.
The Burrell business continues to have full capability, both domestically and internationally. We have about one third of our team at home working. We are awaiting an infrared thermometer. It is likely
daily testing of all staff and clients on arrival at our offices together with social distancing may become a permanent feature of life for some time to come. Meeting rooms, door handles and other common areas including reception desks are being regularly alcohol cleaned. Our 84th year will be one to remember. It should finish better in December than it currently appears.
In summary those who exit will be the ones whose portfolios are the most negatively impacted by COVID-19. There is much work ahead, but the Breaking News on several drug fronts and adoption of the Singapore solution should provide quiet confidence that this won’t be Armageddon. Our experience is that Clients who stay engaged and prepare their strategy for the next stage of this Investment Cycle will react quickest and benefit the most. We suggest that you talk to your Burrell Advisor.
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