Investors betting against the science of coronavirus are playing a dangerous game

Preparing for the unexpected is part of my job. Until recently, understanding how a virus could turn into a global pandemic that would wreak havoc on the world economy was nowhere near the top of my priorities. Like most others outside the sphere of epidemiology, I failed to see recent events coming.

Perhaps we should have. After all, experts have been sounding warning sirens for years. In January 2019, a US intelligence report warned that the country “will remain vulnerable to the next flu pandemic or large-scale outbreak of a contagious disease that could lead to massive rates of death and disability, severely affect the world economy, strain international resources, and increase calls on the United States for support”.

Part of the problem is that with many other recent outbreaks – including the severe acute respiratory syndrome, Middle East respiratory syndrome, bird flu, swine flu and Ebola – medical experts raised the alarm only for a pandemic to fail to materialise. We now realise they were right to have expressed concern.

Financial markets were far too complacent about Covid-19, hooked on the monetary heroin they had depended upon since the financial crisis. This overreliance has proved costly. Highlighting just how violently markets can move, it is worth remembering that the S&P 500 hit an all-time high of 3,386.15 on February 19 – seven weeks after China alerted the World Health Organisation to several mysterious cases of pneumonia in Wuhan. Investors’ complacency has now been replaced by fear. On March 19, one month on from its peak, the S&P had sunk 29 per cent.

This shows a clear disconnect between the medical literature and financial markets. Much of the research on Covid-19 is freely available and is easy to understand. Speaking as a mathematician, mathematics underpins much of the science of the spread of an epidemic, so it did not take me long to appreciate that what financial analysts were saying was incorrect.

In epidemiology, R0, the basic reproduction number of an infectious disease, is the expected number of cases directly generated by one case in a population where all individuals are susceptible. In a simplified model, R0 depends on three factors: the probability you will infect someone if there is social contact; how many contacts you have; and the probability those contacts are susceptible to the virus because they have no immunity. If R0 is above 1, the virus will spread; the higher the value, the harder it will be to control.

With airlines in stall mode, the global economy cannot take off too

In the research, there was strong evidence to suggest the virus was unlikely to be contained. This was different from the view in the market and prompted me to look into why viruses such as Sars peaked and stopped.

Since everyone is susceptible in the early stages of an outbreak, the first two factors – the probability you will infect contacts and how many contacts you have – determine the spread of the disease. With Sars, people were only highly infectious when they were very ill, which enabled the authorities to trace contacts before they became contagious. Effectively they were able to reduce the number of contacts of those infected to zero.

Unfortunately, evidence suggests Covid-19 can be transmitted by people who are asymptomatic or have mild symptoms. So, it is almost impossible to identify those infected before they become contagious. Social distancing at population level is required. However, since this is hard to achieve for the whole population. Most experts believe that the disease is likely to come back in waves as and when social distancing measures are relaxed.

Governments have resorted to strict lockdowns. That is crushing economic activity, which has in turn led to the financial market meltdown.

Surprisingly, plenty of investors are now trying to call the bottom of the market. However, if recent events ought to have taught investors one thing, it is that betting against the experts is a dangerous game.

Investors might do better to reduce risk in their portfolios, while remaining alert to opportunities to add it back when it seems appropriate on a two-to-three-year horizon. One thing seems certain: investors should scour the medical literature for better insight into Covid-19’s progression before making big investment calls.

Ian Pizer is senior strategist, Multi-asset & Macro, at Aviva Investors