Last week’s markets provided a brief glimpse into ‘what if we are wrong?’ scenario
Last week we saw what looked to be a brief quarter-end related profit taking in cyclicals and re-opening plays while growth names generally held steady. With US treasury bond over-supply jitters easing for now, as there were no major signs of indigestion from last week’s auctions, long term rates also eased off. This was somewhat surprising given talks of Mr Biden’s additional $3tn spending plan on public infrastructure which surprisingly didn’t seem to exert any upward pressure on rates earlier in the week. Possibility of tax hikes in the US could have also helped ease long term supply concerns.
Although this trend reversal did indeed prove short-lived, it did provide a glimpse of what could happen if we our call proves wrong and the pandemic in the West drags on much longer than summer. With the third wave of Covid coming as re-opening of economies unleash the new more contagious variants into our echo system, this uptick in infections is well within our playbook which calls to an end to the pandemic in more developed markets by the end of the summer season. Although, we remain highly vigilant of related developments, it should be noted that once again the pattern of this pandemic is closely following that of the Spanish Flu 100 years ago.
Despite 3rd wave, the end to Covid looks near
If this correlation holds, this wave will likely to be the last big one. However, during the Spanish Flu, the medical technology was not anywhere as advanced enough and vaccines of any kind had yet to be developed which we think will make a huge difference this time. Indeed, looking at states which are at a more advanced stage in their vaccination programs, it seems all virus variants are on the retreat once these inoculation programs get scaled up and become more efficient. To be sure, global infections rates will continue to ebb and flow, but we think the key indicator to the end of Covid remains the fatality rates which are generally heading in the right direction.
Moreover, with re-sequenced mRNA jabs from Pfizer and Moderna coming to directly address the more concerning South African and Brazilian strains while the upcoming Novavax jab which should be released in the UK by next month, has the country’s own variant firmly in its sight, we have high hopes that with more vaccines coming, Covid is on its last leg. Also, Johnson & Johnson’s first batch of its one-jab solution is about to be released and having tied up with Merc, its production is likely to get scaled up dramatically over the next few months. We are also hoping for AstraZeneca to finally get its act together and get on with supplying its Covid vaccine which even its revised efficacy rate in the US trials still seem impressive enough to lift concerns.
China-related geopolitical risks on the rise once again
In our previous few week’s publications, we had highlighted the perceived merits of investing in Japanese stocks which have high gearing to China, Japan’s largest trading partner, but are also somewhat insulated from geopolitical risks that are visibly rising from directly investments in China. However, in the case of Japanese consumer brands sold in China which can be subject to boycotts by Chinese consumers, there are renewed risks brewing that demand high level of vigilance.
The latest spark has come from the escalating controversy over cotton sourced from China’s Xinjiang region where the plight of the country’s Uighur community is being closely watched by the world, pushing retailers like H&M to announce their policy against such sourcing. With names like Uniqlo and Muji also having significant retail exposure in China and even non-apparel brands like Toyota or Shiseido could also get engulfed in such boycotts if Japan is identified as interfering with China’s domestic policies, we think geopolitical risks have risen enough to ponder hedging against such a scenario.
It should also be noted that although the US Biden Administration is far less confrontational with China than its predecessor, it is also less transactional in its motives and more principled in its policy approach. We think a more united front by US and EU are likely to become more hawkish as reported power abuses in Xinjiang or HK will no longer be shrugged off if say China simply pledged to adjust its trade policies to import more goods. We think this makes probabilities of any resolution that could improve the strained relationship between China, the US and its allies look highly remote at this stage.