The second wave

When Covid-19 first emerged in December 2019, it was widely regarded as a Chinese problem. Global markets initially reacted with trepidation at the possibility of the supply side disruption, then with reassurance when China took the aggressive action of quarantining Hubei, the province in which the virus originated. Over two months after the start of the Hubei lockdown, the world economy is in a precarious state. 40,000 new cases a day are being reported at the time of writing, with extreme containment measures being introduced in the hope of impeding the virus’s spread and easing the strain on national healthcare systems. With an 11% increase in daily cases (at the time of writing), compared to the previous week’s 14% increase, the measures appear to be slowly taking effect.

Without any modern precedent for lockdowns of this magnitude, we can only look to Italy and China, two of the most affected countries, as base cases that the rest of the world might follow. Unfortunately, neither country has fully recovered from the virus.

The Chinese recovery story is possibly the most crucial to monitor at this time, as the country begins to return to normality. When China relaxes its restrictions and reopens its internal economy, we will then be able to study the likelihood of a second wave of infections.

As it stands, China is reporting approximately 35 new cases a day, a significant decrease from its peak numbers. The Spanish flu initially evolved in a similar manner– first appearing in March 1918, then declining over the summer. It returned, however, with deadly force in late August of that year. The second wave, spread throughout the world by soldiers on military ships, is generally agreed to have been a mutated strain of the original virus. For two months, the mutated virus killed millions of people around the world. It mutated into a third strain in early 1919; but the lack of international movement caused by the war prevented this final wave from spreading as extensively as the second one did.

If quarantines are lifted, we believe there is a strong possibility for Covid-19 to mutate in a similar way. This adds another aspect to the many complications behind the development of a vaccine, which would need to guarantee immunity to future strains. In the meantime, countries must monitor their internal and external travel carefully as lockdown measures relax over the coming months. Although President Trump has suggested an Easter reopening date for the US, such an abrupt and premature end to containment tactics could be devastating to both the economy and healthcare providers in the event of a second wave.

From a risky asset perspective, we believe there are three key risks posed by the Covid-19 recovery story: the ability of fiscal policy to stop the supply and demand shocks from growing even larger; the virus’s impact on Q2 developed market GDP growth; and the possibility of a second wave.

In our view, the first two risks pale in comparison to the risk of a second wave. Even without a mutation, Covid-19 has proven that it can spread and kill rapidly. Before the global economy can consider staging a recovery, it would require confirmation that any second wave has been subdued.