Update on the coronavirus outbreak

Overview:

As a result of recent developments, we would like to update you on our thoughts regarding the potential economic and financial market impact of the coronavirus.

• Officially known as SARS-CoV-2 (the virus) and COVID-19 (the disease), the coronavirus emerged in China in December 2019 and has continued to spread and multiple countries are now dealing with their own regional epidemics.
• This new coronavirus presents unique challenges to human countermeasures.
• Our healthcare team highlights two potential outcomes:
  • Full containment of all infected individuals.
  • The virus spreads until humans reach a point of herd immunity.
    • The first requires the identification of all infected individuals and their effective isolation from others.
    • The second outcome occurs once a threshold of individuals has developed immunity and the virus cannot find a new host to infect. This requires a large proportion of the susceptible population to be immunized.
    • Immunization can be attained in two ways: through infection or vaccination.
• Social distancing will be required to slow the spread of the virus until we have a vaccine available.
• Disruption to the global economy may be more than initially expected. The duration, extent and severity of the impact are extremely unclear, thus substantially raising the risk of a real economic cost.
• Fear and uncertainty regarding the human and economic impacts of the outbreak are currently weighing heavily on equities and commodities.
• Since mid-January, investors have been aggressively selling shares of companies exposed to global growth, seeking refuge in bonds and other perceived havens such as gold, healthcare and utility stocks.
• We recognize that certain asset classes such as long-term bonds, technology, real estate and infrastructure have benefited from inflows, but we remain concerned about the level of frothiness in their share prices. We worry about the risks of permanent losses of capital when conditions in financial markets normalize.

We have not concluded that we are headed with certainty for a recession. We anticipate that looser monetary policy and fiscal stimulus will mitigate some of the damage and are confident that the longer-term structural underpinnings to growth remain unchanged.

As a result of recent developments, we would like to update you on our thoughts regarding the potential economic and financial market impact of the coronavirus.

Officially known as SARS-CoV-2 (the virus) and COVID-19 (the disease), the coronavirus emerged in China in December 2019. It has continued to spread and multiple countries are now dealing with their own regional epidemics. The drastic containment measures put in place in China, especially in Wuhan and the Hubei province, have slowed the outbreak. However, the profile of this virus makes it very difficult to detect in time for effective isolation measures.

This new coronavirus presents unique challenges to human countermeasures. It has a long incubation period of up to 14 days (even 27 days in outlier cases), it can be contagious before symptoms appear, infected individuals can present with mild symptoms or no symptoms at all, and symptoms are very similar to the seasonal flu and common cold. These combined factors can make the virus virtually invisible to screening and detection methods.

Our health care team has devoted considerable time to understanding the virus and its implications. Currently, there are two potential outcomes: (1) full containment of all infected individuals or (2) the virus spreads until humans reach a point of herd immunity. The first requires the identification of all infected individuals and their effective isolation from others. China’s experience demonstrates that this measure is difficult to achieve. The second outcome occurs once a threshold of individuals has developed immunity and the virus cannot find a new host to infect. This requires a large proportion of the susceptible population to be immunized. Immunization can be attained in two ways: through infection or vaccination. The latter is clearly the preferred route.

The most advanced vaccine candidate against SARS-CoV-2 is being developed by Moderna Therapeutics, a Boston-based biotechnology company. In collaboration with the U.S. National Institutes of Health (NIH), a first batch is ready to start Phase 1 clinical trials. This was achieved in a remarkable 42 days between the sequencing of the virus by Chinese researchers and the manufacturing of first doses for human trials. If the vaccine candidate is effective and substantial resources are put in place to develop manufacturing capacity, a vaccine could be widely available in 2021. Until then, measures to slow down the spread of the virus and to lessen the adverse health outcomes of the infected population are important.

There are ongoing developments in treatments for the disease. The leading drug on this front is Remdesivir from Gilead. The antiviral compound is currently being studied in clinical trials in China and the United States. If the treatment is successful, it will help to significantly reduce the health complications and fatality rates for COVID-19.

Social distancing will be required to slow the spread of the virus until we have a vaccine available. Some of these measures include quarantines, public event cancellations, travel restrictions and port closures. In China, economic activity has almost certainly contracted substantially in the first quarter. Should other countries adopt similar measures, the disruption to the global economy may be more than initially expected. It is fair to say that our growth forecast for 2020 will need to be revised.

In past destabilizing economic events, such as the European debt crisis, Brexit and the U.S-China trade conflict, we had concluded that the global economy was fundamentally solid and able to digest the headwinds. This event, though temporary in nature, differs in that the duration, extent and severity of the impact are extremely unclear, thus substantially raising the risk of a real economic cost.

Fear and uncertainty regarding the human and economic impacts of the outbreak are currently weighing heavily on equities and commodities. Since mid-January, investors have been aggressively selling shares of companies exposed to global growth, seeking refuge in bonds and other perceived havens such as gold, healthcare and utility stocks.

We recognize that certain asset classes such as long-term bonds, technology, real estate and infrastructure have benefited from inflows, but we remain concerned about the level of frothiness in their share prices. We do not believe it is appropriate to speculate on how low rates can go as we see significant risk of permanent capital impairment for long bonds on the horizon. Similarly, we are troubled about exuberance in some areas of the technology sector.
Although some investors may find comfort in hiding in these assets during turbulent times, we worry about the risks of permanent losses of capital when conditions in financial markets normalize.

We have not concluded that we are headed with certainty for a recession. We anticipate that looser monetary policy and fiscal stimulus will mitigate some of the damage and are confident that the longer-term structural underpinnings to growth remain unchanged.

This document has been prepared by Letko, Brosseau & Associates Inc. for informational purposes only and is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations.

Where the information contained in this document has been obtained or derived from third-party sources, the information is from sources believed to be reliable, but the firm has not independently verified such information. No representation or warranty is provided in relation to the accuracy, correctness, completeness or reliability of such information. Any opinions or estimates contained herein constitute our judgment as of this date and are subject to change without notice. Past performance is not a guarantee of future returns.

This document may contain certain forward-looking statements which reflect our current expectations or forecasts of future events concerning the economy, market changes and trends. Forward-looking statements are inherently subject to, among other things, risks, uncertainties and assumptions regarding currencies, economic growth, current and expected conditions, and other factors that are believed to be appropriate in the circumstances which could cause actual events, results, performance or prospects to differ materially from those expressed in, or implied by, these forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements.