B117 Market Collapse

The markets are two things, bullish and pricing in an aggressive reopening.

No matter who you talk to, just about everyone is excited about putting the Covid-19 Pandemic behind us from New York to be back in business by July or Greece to reopen for the big summer ahead; the world is, as the equities markets is ... forward-looking.

This bullish sentiment isn't just reserved for equities either and debt issuance is also running at an all time high even though corporate defaults and bankruptcies have started to rise. This optimistic banking environment is certainly prevailing in the United States but also the emerging market debt issuance in MENA has jumped 61% over Q1 2021, such incredible stuff — we're in for a block buster year, our biggest investment worry should be inflation or a change in the FED attitude from a dovish to a hawkish tone.

For the sake of Risk Management, let's assess where we will be with an alternative scenario. What would happen to the markets if what is priced in today, and equities are potentially overvalued at the moment, but what happens if this forward-looking outlook doesn't come to fruition?

I am not being bearish, just asking the question. Quite simply, how will the world cope if we don't reopen? Can governments go back to a position where they continue dropping helicopter money in excess (Biden probably did take it a little bit too far)?

The thing is, no one is asking these questions. No one, even Warren Buffett apologized for dumping airline stocks last year and claimed he misread the signal.

Let's talk about the virus for a moment.

One of the significant issues with many viruses is that they have short generation times and high mutation rates, which during a long run pandemic, creates the opportunity for the most infectious strains to evolve and to persist.

"If SARS-CoV-2 beds itself down into the hinterland societies of concentrated populations like Brazil, Africa or India, it's likely to mutate into a strain that is potentially more infectious, let's pray that such a target strain is less lethal if it comes to be"

April 2020 | Martin Davies

As bold as this statement was a year ago, it looks like all these countries and the UK has sadly presented us with such an outcome. If India's first wave of Covid-19 was anything but well managed, the second wave is the dying proof that mismanagement or not, B.1.617 Variant is now the main threat, and it's potentially more infectious.

Covid-19 Variant Tracker | New York Times [LINK]

There is another issue — the B.1.1.7 and B.1.617 variants seem to reduce vaccine efficacy rates. Even some people with previous infections from the wild SARS-CoV-2 disease may fall ill twice; it's like we have reset the clock on Covid-19 and have started the whole pandemic saga over from the beginning.

Of course we need to evidence some of these hypotheses and as a resident of Singapore, a place competent at controlling pandemics, I am positioned to observe some concerning developments. The two concerns of vaccine effectiveness and an increase in the transmissibility or R-naught come bundled together in a recent super spreader cluster at Tan Tock Seng Hospital where many of those infected had already been inoculated months ago.

Now there is an argument that without the vaccine, those in the TTSH cluster might have suffered more febrile symptoms and may be that is the true expectation of a Covid-19 vaccine, it isn't to prevent illness but to reduce symptom severity. The thing is, I am not sure such an expectation has either been formally tested or is a commonly held belief nor can we rely on global health departments to be optimistically comfortable allowing such infections to grow as a cost of saving the economy.

"Early results suggest the vaccines are highly effective at preventing people from being hospitalised or dying from the disease. Israeli data shows that the Pfizer/BioNTech vaccine has reduced severe disease by 92% and hospitalisations by 87%"

March 2021 | The Conversation

Let's pop back to our market expectations for a moment. Earnings have been relatively solid, and the pandemic has created a fortuitous situation for companies like Amazon.

There is this old saying to sell in May and go away, but it's hard to be bearish unless the market does not meet its expectation. At the moment, UK economic activity has accelerated at a pace not seen in the best part of a decade; it's a relevant observation as the UK was hard hit by the virus. Retail Sales grew in March, the Purchasing Managers survey rose in April ... the UK is clearly an economy that isn't just meeting prevailing expectations it's exceeding them, then it is also an economy that is not suffering from a B117 market collapse scenario.

So where are we then?

Remember, equities markets are forward-looking, at the moment they are consolidating at the top and reasons for a trend continuation seem to be thinning out, everything the market believes, the market expects is priced in.