Coronavirus – What You Need to Know
Cambiar Senior Analyst Charmaine Chan provides an assessment of the virus and outlook for a potential treatment.
Cambiar Senior Analyst Charmaine Chan has been following COVID-19 since the initial outbreak in China. As a citizen of Macau, where her family still resides, she has extensive knowledge of the impact of the virus. Ms. Chan details the differences between COVID-19 and the common flu as well as an outlook for a cure.
What is coronavirus (COVID-19)?
Coronaviruses are a family of enveloped, RNA viruses, 7 of which cause human respiratory infections. Most strains cause mild symptoms similar to the common cold, while others such as SARS and MERS cause much more severe symptoms such as respiratory distress, and heart and kidney failure in many of those infected, with fatality rates of 10-40%. The newly-emerged strain affecting COVID-19 infections across the globe causes symptoms such as high fever, coughing, and shortness of breath.
The data-to-date suggests 80% of COVID-19 cases are mild/moderate, but potentially 20% of cases are severe. Experts in virology and epidemiology currently model the case fatality rate to be 2.5% based on the incubation time, serial interval, and shape of the infection curve. This is roughly consistent with the empirical estimate determined by dividing the number of deaths by the number of clinically and/or lab diagnosed cases, which is also in the 2% range, with lower and upper bound estimates of 0.5-3%.
The way this virus spreads is not dissimilar to influenza. Infected individuals are potentially able to transmit the virus at least one day before they are symptomatic. However, the primary forms of transmission are droplets when someone infected coughs or sneezes, or through contact with contaminated surfaces. Airborne transmission is also possible, but a less likely mode than the two mentioned. In contrast to COVID-19, clinicians understand the clinical course of influenza, and with vaccines and herd immunity, only 3% of flu cases are severe enough to be hospitalized, and amongst those hospitalized 30% have pneumonia, leading to an overall death rate of 0.2%. With COVID-19, 20% of the cases appear severe, 75% of those hospitalized have pneumonia, and the death rate estimate is 2%.
What is the market psychology behind viruses like this?
Both the public and investors have panicked. There is currently no vaccine, the population as a whole is susceptible to infection, and the disease burden and fatality appears distinguishably higher than the flu.
In late January, the Chinese government took draconian action including quarantine of two or more weeks, matching the estimated incubation period, as well as social-distancing measures such as telecommuting, avoidance of large gatherings, and school closures to try to lower transmission rates. This came with a large economic cost, with February manufacturing PMI dropping to 35.7 from 50, the lowest on record. Investors are understandably concerned about the domino effects of supply chain disruption and potential demand shocks due to changes in consumer behavior. For instance, Japan is considering delaying the Olympics to year-end 2020 due to virus impact.
Since my family lives in Macau, we have followed the epidemic and the intervention measures from very early on. Other regions such as Taiwan, Singapore, Japan, and South Korea are taking similar measures. What is encouraging is that the data to-date suggests these mitigation measures appear to be working, with multiple regions reporting much fewer or no new cases. Experts expect South Korean cases to peak within the coming weeks. The takeaway from the epidemic responses from Asian nations is that swift actions in mitigating transmissions engender public trust in governments, preserve social order and allows citizens to resume economic activities as producers and consumers.
Our feedback suggests that manufacturing activities in China have resumed at a gradual pace, and consumers are slowly returning to vital daily activities. Discretionary spending will likely take months to resume. While we do not expect a V-shaped recovery, both suppliers and consumers are slowly returning to pre-crisis behaviors in China. March will be a key month to watch not just for resumption in manufacturing, but also in demand generation. Japan, Taiwan, Hong Kong, Macau as well as Taiwan have all announced stimulus packages, with fiscal policy likely to be more impactful as many citizens saw reduced work hours and incomes during the crisis.
What research and potential drugs are being evaluated?
The most promising treatment being tested is Gilead’s Remdesivir, an anti-viral originally developed for MERS/Ebola, which is currently in the final phases of human clinical trials for COVID-19. Existing drugs such as chloroquine, interferon-alpha 2s and various antibiotics being repurposed for COVID-19 also appear to have some treatment effect. Various companies such as JNJ, Sanofi, Moderna, Novavax and Inovio have also proposed vaccine development candidates. We believe development will likely take 12-18 months to evaluate safety and efficacy in an optimistic but concerted timeline.
In Cambiar’s view, the best current government response would be to keep the public informed of real-time outbreaks, provide resources to citizens, develop a system to triage patients for treatment depending on severity, and to engage in social distancing measures whenever necessary. These measures, as informed by public health measures in Asia, appear effective in reducing transmission and flattening the peak of infections so that healthcare systems can cope with treating the disease. Moreover, based on studies on other human coronaviruses and air-borne viruses in general, warmer weather, accompanied by higher humidity, could reduce transmission. As temperature and humidity increase, virus-containing droplets are less likely to be suspended in the air for long periods. The stability of outer coat virus proteins also degrades faster at higher temperatures with UV radiation, making them less infectious. Higher humidity also increases the effectiveness of our mucosal lining, which traps and prevents viruses from entering our lungs. Therefore, there is reasonable basis by which experts expect transmission rates to decrease as the weather warms up, though it is important to note this is a new strain and no one could be certain at the moment.
However, what we would emphasize is that there are important mitigation strategies everyone can take today to reduce risks of infection. The World Health Organization (WHO) has noted that droplets transmission (being consistently exposed to someone who might be sick) and formite transmission (touching contaminated surfaces and then touching your face) are likely the main modes of transmission. Thus, by wearing masks in the presence of someone who might be or is sick, by regularly disinfecting surfaces and vigilantly practicing hand hygiene, we can substantially lower risks of transmission. It could be a question of integrating these behaviors into everyday life, acclimating to them as the ‘new normal’, rather than just counting on warmer weather. These behaviors, along with social distancing on an as-needed basis in the short term, could smooth out the infection peak and minimize economic disruptions over the long term.
From an investment perspective, what is Cambiar doing?
We held the view that COVID-19 was likely to spread beyond China, and thus we were not aggressive in buying the early dips. However, given the magnitude of the correction this past week, our PMs have used this as an opportunity to add additional quality to our portfolio or make balanced bets in categories of stocks we deem to have extreme and moderate financial dislocation due to COVID-19, as well as those stocks that are down but have no obvious relationship to the virus. Our base case is if public health measures are enacted effectively in the short-term, supply and demand can gradually normalize to pre-epidemic levels in the coming weeks to months. Asian nations are roughly 3-5 weeks into their recovery, so we will be watching their supply/demand resumptions closely.
Certain information contained in this communication constitutes “forward-looking statements”, which are based on Cambiar’s beliefs, as well as certain assumptions concerning future events, using information currently available to Cambiar. Due to market risk and uncertainties, actual events, results or performance may differ materially from that reflected or contemplated in such forward-looking statements. The information provided is not intended to be, and should not be construed as, investment, legal or tax advice. Nothing contained herein should be construed as a recommendation or endorsement to buy or sell any security, investment or portfolio allocation.
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