🔒 Wikus Marais: Markets panicking because of how Govts reacting to COVID-19, not because of virus itself

In this segment from the latest episode of Rational Radio, economist Wikus Marais present the most cogent explanation you’ll hear of why asset prices are plunging on the coronavirus. He explains why the mortality rate of under 2% has nothing to do with it – but that the reaction of Governments to the spread of the virus is a threat to economic growth and thus to business. It’s currently a race between the creation of a vaccine and the airborne spreading of the latest nasty to mutate from animals to mankind. – Alec Hogg

Let’s Wikus Marais into the conversation now about Coronavirus. Here, in South Africa, we’re dealing with quite a lot of stuff. We have been talking on this program with Gary and Andy Cronjé. They’re school teachers from Durban and they’ve been bringing us up to date as things develop. The last time we spoke to them last week, they said that things seemed to be getting back to normal in China. We saw in Business Day this morning… I don’t know if you saw the big advert from the Chinese Embassy, which shows that the infections in China are reducing now. Certainly, the deaths are reducing as well so it’s almost like China’s got it under control but the world is panicking. Mr. Market is very worried about what’s happening. I’ve heard the story, but is this justified?
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My own opinion is that market reaction has been just about right in the sense that what you have to say is that the coronavirus is a lot like a bad flu, so why would you have a 14% adjustment in rates just because of a bad flu season? And the answer is, it’s actually not the coronavirus symptoms and people who are suffering and dying, which is affecting the market. It’s the measures that are being taken to slow to the spread of the virus.

The question is, why are these measures being taken if it is just a bad flu? Alright, 2% mortality, so that’s a bit worse than a bad flu, I presume.

Yes, it’s a couple of bad flu seasons rolled into one. So, the first thing is that the 2% is probably wrong because we’re not measuring everybody who’s getting infected – anywhere close – so effectively, there’s a lot bigger universe and we are measuring the people who are dying fairly accurately so probably, coronavirus has less than 1% mortality, whereas a normal flu season is about 0.1%s so it’s 10 times the normal flu season, maybe two or three times a bad flu season. But the reason why they’re taking these measures is what you normally do with the flu season is you prepare for it and the preparation is you come up with a vaccine and you vaccinate the professionals who are dealing with patients so you go to the medical professions first because that’s where the spread goes. Then, the second thing you do is you vaccinate the vulnerable population. So, you and I were sitting at this breakfast on Friday morning and we had some ex-CEO’s of South African companies.

Well, it was on retirement so…

But the comment was made that only old men die of this and they were sitting around the table. So, typically what happens is, if you’re vulnerable, you get inoculated. Therefore, that brings the…that’s one of the reasons why the typical flu season is not that deadly and why not that many people get it. It’s because you actually have this vaccination program beforehand. The problem with coronavirus is we don’t have a vaccine and it’s going to be somewhere between six months and a year – probably – before we have a vaccine. So, what people are saying is if we can’t contain it for long enough, that we can actually develop a vaccine and prepare for it properly. Then it would be much less severe. The other thing that happens is you want to spread out the infection over a longer period of time because typically, what seems to be happening is about 15% of patients get hospitalised and about 5% of patients need to go into intensive care. So, your facilities will come under a great deal of pressure if everybody gets it at the same time. So, if we can have it slowly over a three-year period, then we can kind of cope with it. If we get it all at once, it’s much more severe. So, what we’re doing or what governments around the world are doing are they’re taking very severe measures. So, even in Italy, they’re putting all kinds of quarantines on towns, etc. in order to slow it down because I think that everybody’s now accepted that this is an airborne virus.

How do you slow it down, though?

It will go viral.

How do you slow it down?

The first thing is that you can’t prevent it from spreading but you can slow down the spread by putting in things like quarantines, which means that people from the affected areas don’t go across the world and spread it immediately.

So, it’s a race to get the vaccine.

It’s a race to get the vaccine and initially, also a race to get testing equipment because while it’s at low levels, you want to know if someone’s got it. Once it gets into the general population, you look at symptoms but initially, you want to test and there is only a limited testing availability at this point so you want to contain it to test firstly, and then secondly, to get to a vaccine and that slows the whole thing down and it limits the deaths and the really severe cases.

The containment process is what’s scaring the markets, not the coronavirus as an existential threat to mankind.

If we look at it three years from now, we’ll say, “You know what? We’re all back to normal.”

But that would talk to your point then, David. Three years from now. You don’t invest today so you can make money tomorrow. You invest so you can make it in the long term.

I think the markets have reacted as though the world is going to go into a deep recession. In other words, it’s discounting the worst possible outcome that supply chains are simply going to halt and you won’t be able to get any supplies. I’m not brushing this aside at all. I think that we must take this seriously and exactly as Wikus has said; you’ve got to prepare for these kinds of viruses because they’re going to keep coming around all the time. The market is something else. We’re used to that. We’re used to these kinds of responses. The thing that you should expect from Mr Market though, is surprises move markets so the market shouldn’t be surprised that we’re getting something like coronavirus but it can be surprised that we’re getting it now and because of the way that we discount things, something that may happen in the far future…so, you know what? 

We will have the incidences with pathogens coming in but if it comes now, that means your discounting of immediate profit gets discounted more severely and that’s why markets move on the surprise that we are getting the coronavirus now, so it should affect the market. But then the next question is, what is actually scaring the market? Then, we have to go back and say, “Where were we in the economic cycle before?” and then you’re saying ‘we were at that very vulnerable point for the world economy because actually, Europe is at a standstill already. Was it at a standstill before coronavirus? Japan is in a recession already because they’ve been silly enough to put that up massively, so that’s shrinking already. The US was kind of eking out 2% in spite of all the stimulation that had been put in from the tax cut and the interest rate cuts etc. so it was already vulnerable.

So now, if you go into a situation where supply chains and where people don’t travel and where they don’t book various things…  The other thing that happens is all about business confidence, so business will stop investing and say ‘let’s see how this plays out’ and if that tips into recession, we haven’t… It seems to me that 2010 is the first decade since 1820 in which we haven’t had a recession. Effectively, we’re overdue for a recession. There will be some imbalances that come to the fore once we tip into recession, so it’s the fear of that recession that’s affecting market.