In today's Exponential Investor...
- One year anniversary of not giving a damn
- Some fear we're in the same place, with new variants
- But even if the threat is lower, does that mean the consequences will be too?
The Chinese, English, and South African variants float into a pub... There's probably a joke in there, but now I'm just daydreaming about going to the pub, and I imagine I'm not the only one.
I live above some shops just off a major high street, within 400 metres of at least six pubs. Our favourite local though, is a seven- or eight-minute walk into the residential maze of South London. Far from the bustling crowds, it's a blessed spot where shot-downing wolf-whistling rugby lads rarely tread. That's where I'll be heading when the time comes.
But will I be able to soon?
Over 100 million people have now been infected by Covid-19 worldwide.
During that process, a number of mutations have emerged.
These are causing increasing alarm in some circles... but in a manner that brings back eerily similar memories of this exact time last year, financial markets don't seem too bothered.
Should they be?
I myself have fallen into a psychological trap.
I have tired slightly of "keeping up with the coronaviruses".
Months of lockdown makes you pretty focused on one thing only – national cases, hospitalisations and deaths here in the UK.
Happily, all three are coming down, and 15 million people have been vaccinated in double quick time.
The hope is, this means that even if cases rise again, the most vulnerable should be safe and hospitalisations and deaths shouldn't come anywhere near previous levels.
So like many of you, I imagine, I haven't quite had the energy to really delve into all the new variants.
This morning though, I have done, in order to see whether we're being lulled into the same false sense of security as last February.
Because in seven days, it'll be the one-year anniversary of the first day markets crashed.
It was only 3%, but it felt so significant.
I was actually on holiday at the time, and I was not the editor of this newsletter.
That day though, I sold between a third and a half of my personal investments.
When I wrote
When the game stops, stop, this was what I was referring to. It's okay to stay invested in scary, overvalued, economically difficult times... as long as you're aware that the time to sell may come at any time, and you're ready.
I remember this time last year, feeling that a crescendo was building. People were sunning themselves on the beach, as the tsunami approached.
In hindsight, it's remarkable how blasé we were. How we didn't realise that what was happening in China and Italy would happen exactly the same here.
Hell, we laughed at those silly Italians, queueing for supermarkets – that would never happen here…
And we were horrified by the lockdowns in
barbaric China...
And we bought stocks, until the crest of the wave was breaking on to our shores.
Having felt that the reckoning was coming, that first 3% down day looked to me like the penny dropping, and I ran for the hills.
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If there's music playing, keep dancing
Today, valuations are much more stretched and the herd mentality of investors is more extreme. But the new variants seem less threatening.
What exactly are they?
This is from the Financial Times:
Like the B.1.1.7 "Kent variant" in the UK, the 501.V2 variant first identified in South Africa has about 20 genetic changes from earlier forms of the Sars-Cov-2 virus. The one causing most concern is called E484K — nicknamed Eric or Eek.
It alters the surface of the spike protein that the virus uses to enter human cells. This shape-shifting makes it harder for the immune system to recognise and destroy the virus, if it has been trained by vaccines based on previous forms.
The same E484K mutation is present in the P.1 variant driving a surge of Covid-19 in Brazil.
Please allow me to insert my disclaimer here: when it comes to medical technicalities, I am no better than anyone – I have no informational advantage on that side of things.
But with a basic understanding of the threat and spread of the new variants, hopefully that can help inform our position as investors in one of the most overvalued stock markets of all time.
So as I understand it, there are two main concerns about the variants:
- That they are either more deadly or spread more quickly
- That they might be resistant to the vaccines, which is currently our only way out of this mess.
The concern from six to nine months ago, if I remember correctly, was because Covid-19 was so virulent, that it spread between people so easily and that this raised the threat of mutation.
So apparently... New Zealand has just discovered its first three cases in a while, and they are the "English variant".
Our most recent wave has been dominated by the Kent variant, which is a more virulent form.
South Africa paused its vaccine programme because its variant seems to be slightly resistant to the Oxford/AstraZeneca vaccine it has been rolling out.
Vietnam is shutting down huge swathes of the country after two months with no cases, after a breakout of the Kent variant.
And from Brazil, news is coming out of a variant that is three times more virulent than the original strain.
Depressingly, Guinea has also just declared an Ebola epidemic after three deaths. That is very scary given that so many resources are dedicated to fighting Covid-19 – any serious Ebola breakout would be disastrous.
So here in the UK we've suffered the worst effects of our own Kent variant... but ought to be fairly concerned by the resistance of the South African one to our vaccines, and by the more virulent forms too.
From an investment perspective there are two major differences, I would say.
Firstly, we are coming off the back of a huge surge in cases. Vaccinations are rising and cases are falling, so there are genuine reasons to be optimistic. Also, the population is not wholly unexposed like the first time. Aside from those vaccinated, many people have had it which seems to convey a level of immunity for a while.
Secondly, people are more prepared. Hospitals are better at treating it, citizens are better at avoiding indoor shouting matches and washing their hands. The response mechanisms are also a bit sharper – like lockdowns or economic support mechanisms (no comment on the government's performance or their efficacy for now).
So it is not the same unexploded bomb that it was precisely a year ago, when this completely new thing was coming and few people had any idea.
However, many financial markets seem to have "priced in" vaccines and re-openings. A narrative has been built up and accepted by most market participants, and narratives are crucial drivers of momentum in markets ("the US housing market is solid as a rock, it never fails").
Should governments decide, rightly or wrongly, that continued lockdowns are necessary to prevent higher cases (even if vaccinations mean that hospitalisations and death rates are much lower among vulnerable segments of the population)… then the crack that opens in the assumptions underpinning markets could be interesting.
I am SUCH a broken record at this point so I apologise, but this is an important point.
If something has a high price, that doesn't mean it's going to fall
tomorrow.
It means that the market is fragile to shocks, and that drawdowns may be more severe than normal.
This is where we are in most major financial markets today.
Investors shouldn't fear the new strains because they will have the same economic impact as the first strain this time last year.
They should worry that it doesn't take much bad news to send markets into a tailspin these days.
With huge flows of money in passive funds dominating markets, "value at risk" (VaR) models forcing hedge funds to "reduce risk" (sell positions, de-leverage) when things don't go their way, and volatility spikes forcing many mutual funds to sell stocks to "maintain balance", there are structural reasons why it's the fragility that's the problem, not the variants.
We aren't looking for a ton of straw waiting to crush the camel. We're just looking for that last strand, which makes it pause, falter, and buckle.
The variants' main threat (to investors) is to the
narrative of re-opening and economic revival.
All the best,
Kit Winder
Editor, Southbank Investment Research
PS Speaking of
new variants, there's a feeling building that we're nearing "alt-season" in the crypto markets – when all the small and niche projects finally gain recognition while bitcoin smashes higher. Want to know more?
Check out Sam Volkering's latest research here...
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