Covid-19: A tale of two questions
It is becoming difficult to determine whether the rational response to the outbreak of the novel coronavirus – now formally named Covid-19 – is continued vigilance or benign neglect.
On the one hand, the seasonal flu is a greater threat to our collective health. On the other, the current situation does have the potential to escalate into a global crisis.
As with many existential crises, the level of scenario analysis required to get our heads around it can induce a sense of information paralysis, so for those of us with a professional interest in the global market implications of Covid-19 as well as the small personal interest in the future prosperity of humankind, I suggest that our collective attention should focus on two separate but related questions.
Question One: R-what?
Media musings about the validity of China’s Covid-19 data is not entirely surprising and there is good reason for a degree of cynicism when interpreting data produced by the Chinese state. While the number of fatalities is a significant statistic, it will not help us discern whether what is currently an epidemic will reach pandemic status. For that, we need an accurate assessment of a number called R-0 or R-naught.
R-naught is basically Covid-19’s reproductive number or, put differently, the number of new cases each infected person will cause. Much like the human population, if Covid-19’s R-naught figure is less than one, the outbreak will eventually die out. If it is greater than one, the outbreak will continue. Current estimates suggest an R-naught of anywhere between one and five for Covid-19. For reference, SARS was a two to four.
R-naught is at the heart of the challenge of figuring out whether Covid-19 is a real worry or not. First of all, the virus’ reproductive number is not fixed. It is influenced both by individual immune systems’ reactions to the pathogen, hopefully giving us higher levels of immunity over time, and by whether we moderate our behaviour to avoid sick people.
Of equal if not greater importance is the accuracy of the data points used to estimate R-naught. On this subject I admit to being influenced by Ben Hunt’s musings on the topic. Hunt’s credentials are there for all to see and his statistical prowess aside, it is most often his sense of history and ability to sniff out constructed narratives in a world awash with information that keeps me coming back for more insight.
Back to China and the available Covid-19 data points. So far, the reported number of fatalities and new cases of Covid-19 in China have not followed the trajectory expected from any uncontrolled epidemic. For the maths enthusiasts out there, early epidemics will always take the form of an exponential line of some sort due to implications of the R-naught number. If the current R-naught number is higher than two (as the World Health Organisation has indicated is likely), then the reported number of new positively diagnosed patients simply does not fit, appearing instead to follow a highly unlikely, if not impossible, “quadratic” path.
China is currently fighting two wars; one in which the aim is to bring this epidemic to a halt, and another in which the aim is maintaining the appearance of progress while doing so. The implications of the first part of that dual strategy for the rest of the world are pretty simple. We are nowhere near knowing what the global fallout of Covid-19 will be and we can but hope that public health interventions and immunological adaptations work in our favour.
Question two: Will Covid-19 derail the global economy?
Putting aside for a moment the clear implications of question number one on question number two, it is worth contemplating what the economic repercussions of Covid-19 might be.
The world currently has no choice but to put its trust in the WHO, an organisation that so far has shown little inclination to question the Chinese party line on the spread of Covid-19. China plays a hugely important role in global economics and the effects of the current crisis could endure for a long time, even if the epidemic itself is controlled in a timely fashion.
China is now the world’s second largest economy and it is central to a diverse range of global supply chains. So far, Covid-19 has caused broad industrial shutdown as tens of millions of people’s movement is restricted in cities across the country.
It is hard to overstate the effect this will have domestically in China, as trade comes to a virtual halt. Wuhan itself has 11 million people and functions as the third largest educational and scientific base in China. A month of standstill will take its toll and the Chinese president has acted accordingly, slashing tariffs and making borrowing cheaper.
Stock markets are responding, but as central bank action becomes an ever greater influence on equity market valuations, it is perhaps more appropriate to use the oil price as a proxy for economic impact. Oil prices have fallen dramatically since December 2019 due to lower demand and no wonder – the daily consumption of oil in China is equivalent to the combined needs of France, Germany, Italy, Spain, the UK, Japan and South Korea.
Assuming that Britain is able to contain its currently small number of people diagnosed with Covid-19, we are going to feel the broader effects of the epidemic largely via our exposure to the global economy. Dramatic oil price falls (as evidenced in the graph above) tell their own tale of supply and demand and the situation is also a direct hit to the “Phase 1” trade deal the US and China agreed in early January.
The number one risk posed by Covid-19 to China – and therefore the world – aside from the obvious and devastating human tragedy, may be one of external and internal reputational damage. How will Covid-19 affect China’s reputation as a reliable trade partner? And how will the top-down regime deal with domestic rumblings about the relative inability of an authoritarian state to deal with a public health crisis, compared to more transparent countries?
As things stand, there are more questions than answers, admittedly, but when framed like this it is no wonder that China is currently spending considerable efforts influencing WHO output.
Without making too many assumptions it is safe to say that we are moving closer to a day where it will be China’s economy, rather than America’s, that leads us into a global recession.
Written by Eline Lofgren - Investment Manager at Tilney Group, an investment and financial planning company.
Eline is an investment manager based in Tilney’s Glasgow office where she manages investments primarily for high net worth private clients, charities and pensions. Originally from Norway, Eline holds an MBA (Econ.) from Marshall University in West Virginia and is a Chartered Member of the Chartered Institute for Securities & Investment (CISI). In addition to her work at Tilney, Eline serves as a Trustee for the Veterans’ Foundation, a nationwide source of funding for UK armed forces charities.
17 February 2020