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A patient receives a jab as part of a drive for childhood vaccines required for school registration in Los Angeles on August 12. Government efforts to accelerate development of a Covid-19 vaccine have increased scepticism and anti-vaccination sentiment. Photo: AFP
Opinion
Nicholas Spiro
Nicholas Spiro

Coronavirus recovery: vaccine scepticism poses a threat to stock markets

  • While there is no question policymakers are loathe to reimpose nationwide lockdowns, investors downplay the threats posed by Covid-19 at their peril
  • Markets are underpricing risks of new lockdowns in several major economies. Assuming that a vaccine will end economic disruption looks increasingly shaky
There is no shortage of perplexing trends in financial markets these days. However, the most troubling is the prolonged period of indifference about the Covid-19 pandemic.
Since mid-July, the total number of confirmed cases globally has more than doubled to nearly 30 million, according to data from Johns Hopkins University. What is more, Europe – which appeared to have the virus under control as recently as early July – is suffering a second wave. The seven-day rolling average of new cases in the European Union is now almost on a par with the level in America, data from the Financial Times shows.

Yet, as the pandemic rages on, global stocks stand near record highs, with the MSCI All Country World Index up around 10 per cent since June 21. Measures of volatility remain subdued.

In Bank of America’s latest fund manager survey, published on Tuesday, respondents said they felt more confident about the global economy. Nearly half of those polled say they believe the recovery is in an early cycle phase, compared with 37 per cent who say the world remains in recession.

To be sure, the dramatic gains in asset prices are understandable. As I argued previously, monetary and fiscal support has been even more aggressive than during the 2008 financial crisis, powering the rally.

01:39

China prepares for coronavirus vaccine mass production though clinical trials are not yet complete

China prepares for coronavirus vaccine mass production though clinical trials are not yet complete
However, while unprecedented stimulus is crucial for sentiment, it has overshadowed an important shift in the market narrative around Covid-19. While investors were previously concerned about governments’ ability to contain the virus and once hung on epidemiologists’ every word, they have become more relaxed about the spread of the disease in recent months.

This is partly because the resurgence of the virus, particularly in Europe, is concentrated among younger people and has not yet resulted in a renewed spike in hospital admissions and fatalities.

Some investment strategists believe “herd immunity” – the controversial policy of letting the virus run its course so a sufficient number of people who have contracted it build up immunity, causing the disease to burn itself out – is beginning to take root.
The appeal of herd immunity from a market perspective is that it marks a shift from the previous policy of trying to eradicate the virus completely, which requires draconian lockdowns and strict curbs on travel.

By being more tolerant of new infections and focusing on reducing the strain on health care systems and lowering mortality rates, policymakers can take a less disruptive and more surgical approach to fighting the pandemic.

In a report published earlier this month, JPMorgan summed up the new narrative taking hold among investors: “Governments can adopt a different approach to managing the second wave. Broad-based shutdowns are not needed. Instead, governments can focus more on limited local controls.”

05:55

What if Covid-19 is here to stay? Why we may need to prepare for the coronavirus becoming endemic

What if Covid-19 is here to stay? Why we may need to prepare for the coronavirus becoming endemic
While there is no question policymakers are loathe to reimpose nationwide lockdowns – particularly in the United States, where President Donald Trump is strongly in favour of pursuing herd immunity – investors downplay the threats posed by Covid-19 at their peril.

First, there are deep divisions among epidemiologists about the appropriate response to the virus resurgence. Persistent problems with testing and tracing regimes, as well as signs that the disease is starting to infect the elderly again, could force governments to reintroduce sweeping restrictions.

Second, markets are underestimating the extent to which the response to Covid-19 has become politicised. This threatens the perceived safety and efficacy of a vaccine – the most important determinant of the longer-term outlook for the global economy and markets.

Trump’s efforts to speed up the approval process before November’s presidential election have tarnished the reputation of regulators and increased anti-vaccination sentiment.

Only 21 per cent of Americans would agree to get inoculated as soon as possible if a vaccine became available, with 77 per cent of Democrats saying that if one became available this year, their first thought would be that it was rushed through, according to a YouGov/CBS News survey published last week.

02:35

‘I’m a little upset with China’, some of Trump’s more memorable quotes on the coronavirus pandemic

‘I’m a little upset with China’, some of Trump’s more memorable quotes on the coronavirus pandemic
Rapidly diminishing confidence in the safety of a vaccine poses a significant threat to markets. According to the Bank of America fund manager survey, as many as one-third of respondents expect a credible vaccine to be announced in the final quarter of this year.
Markets are not just underpricing the risk of new lockdowns being imposed in several major economies. The assumption that a vaccine will put an end to the economic disruption caused by the pandemic – a crucial underpinning of the ferocious rally during the past six months – looks increasingly shaky.
What is more, complacency over the virus comes at a time when technology stocks – the part of the market that has benefited the most from lockdowns and social distancing – have come under pressure amid concerns about lofty valuations.

As if misjudging the threat posed by the virus was not enough of a threat to sentiment, the refuge from the Covid-19 crisis is now being put to the test.

Nicholas Spiro is a partner at Lauressa Advisory

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