How nations have chosen to respond to COVID-19 has provided to be an interesting look into their innate culture, philosophy and values. It is too early to define the best strategy, and differing positions along the individualist vs. collectivist paradigm means it will remain subjective. A nation’s approach has vast second order effects on health, economic, and social factors. We are dealing with data that is enormous yet incomplete, country-level experiences that are varied and many uncertainties on what will become of the virus in the long-term.
Low testing rates in many countries coupled with the disease’s frequently asymptomatic appearance mean we do not have perfect information to analyze its current impact and future trajectory. However, as research analysts, we are familiar with dealing with imperfect information.
Given the uncertainty, the Cambridge team has been focused on our process; highlight what we know, tighten the bands on probability ranges for what is possible and be cognizant of what we do not yet know. We apply this lens to companies at the micro level to determine the near and long-term implications to their fundamentals, while balancing that with what is implied in their valuation. This allows us to uncover ideas where the fundamental impact appears overstated relative to the impact on intrinsic value and avoiding businesses where the opposite is true. High moat businesses with conservative balance sheets broadly remain well positioned here.
A quick comparison: Iceland vs. the United States
Specific to the United State’s issue with testing, we do have varied country statistics that we can contrast to form a clearer picture. For example, Iceland is one country that has run a successful testing program with over 10% of their total population tested. This is compared to the U.S. which has only tested 1.7% of their population. As of April 27,2020, Iceland has had 10 deaths, in 1,790 official infections for a death rate of 0.6%, which compares to the U.S. at 5.2%. This U.S .death rate is inflated by the under-reporting of virus cases, which we can partially account for by using Iceland as a precedent. Both countries have similar age demographics and smoking rates; but the obesity rate in the U.S. is 2.5x higher with life expectancy at birth three years below that of Iceland. Offsetting this, Iceland has more mature cases of COVID-19, as they experienced a surge earlier. With these differences, and the small sample set in mind, we can conclude that the U.S. official case count is likely many times higher with the death rate much closer to 1% than 4%. This could mean that the disease severity is lower than implied by the official numbers, and this has implications for herd immunity.
We have seen strong support from the health care industry to bring novel therapies into trials and diagnostic tests to market. There are now over one hundred treatments in development, over seventy vaccines and nearly every company with a molecular diagnostics division has developed a test. The private sector has been up to the challenge and regulators are being accommodative. Initial treatments are frequently being repurposed from other infectious targets and have shown marginal promise, yet first generation ones are not going to be magic bullets. As is often the case in virology, this will take repeated testing and better controlled studies.
What we know
- Official new cases per day have plateaued in the U.S., the hot spots in western Europe are well below prior highs, and containment measures from most Asian countries have been successful.
- COVID-19 related hospitalizations and deaths are likely reasonably well recorded overall.
- Intensive care unit (ICU) capacity and current utilization on a local basis.
- Severity is high for seniors and those with existing health conditions. Death rates amongst the young and healthy are much lower.
- Immunity is thought to last for one to two years with a few odd cases of re-infection.
- A plethora of treatments and vaccines are being studied.
What we need to know
- Total number of cases including those less severe to determine underlying severity and existing immunities developed.
- Success of the vaccines/therapies in development and timeline for broad-based accessibility.
- Data on emerging market countries as initial data unsurprisingly appears substantially under-reported.
- Seasonality trends, if any, do indeed exist as even the normal flu’s seasonality is not well understood.
Re-opening local economies requires control over new case counts, adequate ICU capacity, and strong data capture to understand the underlying picture. We believe this should be done incrementally on a regional basis, as the above first two measures are local. New serological studies in the U.S. will help to improve the last point as anti-body testing can identify individuals who have or had the virus. Studies are currently ongoing that will test a random selection of the population to identify true prevalence. Better understanding of the severity of the disease can inform cost/benefit decisions and specifically flag individuals who have developed immunity and therefore can return to the workforce under less stringent measures. Herd immunity is likely still minimal, but health care workers could specifically be assigned amongst the hospital wards based on this possibility.
Regular flu vaccines reduce the risk of flu by 40%-60% during season’s when it is well matched, but have achieved average efficacy of 29% over the last decade. It is unknown what efficacy will initially be against COVID-19, but vaccines will be a key solution to lowering the rate of infection in the long-term.
Johnson & Johnson’s 2020 first quarter results included a surprisingly accelerated timeline for their vaccine, with plans for a trial to start in September 2020, data by year-end 2020, and a capacity of 600 million to 900 million annual doses in the first quarter of 2021 (which ramps up to one billion by the end of 2021). Experts previously considered it would take until late 2021 for a vaccine to be commercially available with low initial capacity. The combination of a motivated regulator and corporation willing to build production capacity at-risk ahead of approval has accelerated timelines. Johnson & Johnson will be running this as a non-profit venture, which further projects the health care industry as the ‘good guys’ during a U.S. election year.
Much has been written on how this virus will permanently alter our lives. It certainly has stress tested our health care infrastructure, national coordination, and societies collective willingness to cooperate for a greater good. While history is rarely remembered long-term, I will feel better living in a society that has experienced a severe pandemic. A priority on early broad-based testing, local production of necessary items along with substantially higher stockpiling and experiences from this will leave us better prepared to analyze, treat, and address a future virus. We have already seen the public and private sectors come together to find a solution in a way that neither could on their own.
Source: World Health Organization, April 2020; Centres for Disease Control and Prevention, April 2020
This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or construed as an endorsement or recommendation of any entity or security discussed.. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication. Market conditions may change which may impact the information contained in this document. All charts and illustrations in this document are for illustrative purposes only. They are not intended to predict or project investment results. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies.
Any opinion or information provided are solely those of the author and does not constitute investment advice or an endorsement or recommendation of any entity or security discussed or provided by CI Investments Inc.
Certain statements contained in this communication are based in whole or in part on information provided by third parties and CI Investments Inc. has taken reasonable steps to ensure their accuracy.
Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained herein are based upon what CI Investments Inc. and the portfolio manager believe to be reasonable assumptions, neither CI Investments Inc. nor the portfolio manager can assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.
Cambridge Global Asset Management is a division of CI Investments Inc. Certain funds associated with Cambridge Global Asset Management are sub-advised by CI Global Investments Inc., a firm registered with the U.S. Securities and Exchange Commission and an affiliate of CI Investments Inc.
CI Investments® and the CI Investments design are registered trademarks of CI Investments Inc. “Trusted Partner in WealthTM” is a trademark of CI Investments Inc.
© CI Investments Inc. 2020. All rights reserved.
Published May 4, 2020