LEVATUS Q & A | Coronavirus Update: Risk Planning and Thoughtful Investing
Susan, LEVATUS CEO and CIO, and Keith, Chief Research Officer, answer questions about Coronavirus News and Updates
Photo by Adrien Delforge on Unsplash
In light of the rapidly evolving news in the past week, Jessica followed up on her earlier Q&A session with Susan, LEVATUS CEO and CIO, as well as Keith Savard, the Chief Research Officer at LEVATUS. They discussed some of the common questions clients are asking, as well as their take on where we are headed.
News about the virus is changing so fast. What is your read on the current situation?
Yes, since we did our Q&A piece on the virus about a week ago, the intensity of the efforts to do the right things in order to stabilize the situation have ramped up. While this makes the headlines scarier now, it will hopefully make people more aware of the precautions necessary to help to slow the advance of the virus. The Washington Post did a terrific graphic piece on the impact of social distancing (link here). The bottom line is, each individual can really make a big difference in how fast and how far this disease spreads. It is a positive that many people are becoming more aware of how exactly they can do their part.
What do you think the impact to businesses and jobs and the economy will be?
Each episode of crisis in the past had its own unique circumstances as does this one. On the negative side, the U.S. economy is on the tail-end of a record long business cycle as well as a disruptive period of trade relations with China.
On the positive side, it appears that policymakers and legislators are trying to implement a more targeted approach to helping those most in need from the dislocations impacting the economy. The first batch of assistance is directed at household needs, including paid sick leave for hourly workers and food assistance for those affected by school closings. Small businesses will also be eligible for assistance. Subsequently, assistance will be directed to airlines, hotels, the cruise line industry and others that are taking a direct hit from efforts to short circuit the spread of the coronavirus.
Given the unusual nature of and reaction to the coronavirus, as well as limited real data at this point, it is difficult to say with any precision what impact it will have on the global economy in the months ahead. Much will depend on the effectiveness of measures recently announced by the Federal government in cooperation with state and local authorities. Active participation of the general population in taking the virus seriously is crucial, particularly for high school and college age students who appear less susceptible to the virus but can still transmit it to more vulnerable members of the population.
Before a recovery does take place, there is a high probably of a decline in real GDP growth for one or two quarters. Economists have come up with a wide range of estimates for the possible decline. This reflects both the unknown length and degree of the unfolding shutdown of economic activity, as well as the mixed signals coming from prior economic data and financial indicators.
Where are the biggest vulnerabilities to markets?
The biggest vulnerabilities lie in credit markets. Ultra-low rates interest rates in the past decade have caused a significant amount of leverage to build up in companies, markets, and hedge funds. Even before the virus emerged, leverage had become one of the big risks to markets. This is part of the reason why our portfolio construction process focuses so heavily on the quality of company balance sheets. It is also why our short-term funding assets have remained in U.S. government T-bills rather than corporate bonds. Highly levered companies experienced stress with the onset of the virus as business activity slowed. The plunge in oil prices that resulted from actions by Saudi Arabia and Russia exacerbated the stress, as many of the most highly levered companies are in the energy sector.
In a world where liquidity suddenly becomes harder to come by, very highly levered entities risk going out of business and defaulting because they cannot get access to money. At the same time, companies that have been more conservative, and borrowed less, will be able to expand their businesses and take advantage of opportunities.
We are watching credit markets very closely for signs of any further acceleration in stress.
There are a lot of different reports on what drug companies are developing to help address the virus. Do you think any of it is going to make a difference?
The speed of drug development has been breathtaking. Processes that took two years during the SARS virus outbreak in 2003, are taking less than two months with coronavirus. This is because of the degree to which technology has advanced medicine in the past decade. We will get Phase 3 (the final phase of testing) readouts in the next few weeks on Gilead’s leading drug to treat coronavirus. The Wall Street Journal reported that 14 Americans from the Diamond Princess Cruise ship, with an average age of 75, who were critically ill with the virus seem to be doing well two weeks after initiating a 10-day regimen of the Gilead drug treatment. This compares to a death rate of 49% for those who become critically ill with the virus in general population studies done by the American Medical Association. Regeneron and Sanofi have also started trials on existing drugs that could come into circulation quickly.
One of the silver linings of this crisis, once we get through it, will be a better understanding of how much technology has improved our ability to deal with healthcare crisis.
The combination of uncertainty around the virus, worrying about our families and market volatility is brutal. When is it going to end?
There are many unknowns at this point which is causing extreme market volatility. One by one, each element of uncertainty will gain clarity. Even if the news is not wonderful, that clarity will help things to stabilize. As an example, in the next 10 days we will have a better sense of what the trajectory of the virus will look like in the United States. We can all look at the CDC website to see the progression as virus testing accelerates (link here). Will the trajectory in the U.S. be more like Korea, which was very successful in slowing the spread of the virus, or more like Italy, where they have not been successful? In the coming weeks we will know in more detail what government assistance programs will look like. In about a month or less we will have news of the efficacy of the vaccine developed by Moderna and whether it will get us on the path to a viable vaccine by the beginning of the next flu season. As we mentioned earlier, in a matter of weeks we will have data on whether the Gilead drug can improve outcomes for those who catch the virus. There is a lot going on but one by one we will gain clarity on these unknowns, and that is when things will begin to stabilize.
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