Friday, 22nd of May 2020
“The art of medicine consists of amusing the patient while nature cures the disease.”
– Voltaire
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Investor sentiment was buoyed this week by positive early test results for a coronavirus vaccine under trial at US biotech company Moderna, as well as by Chancellor Merkel’s U-turn on German support for a pan-European Recovery fund. News of both broke on Monday, sending risk assets surging higher. The S&P 500 Index was up >3% for the day, while the European STOXX 600 Index rose >4%. Emerging markets were more muted in their immediate response but have benefited from the risk-on mood and have outperformed for the week as a whole (at least so far). Nevertheless, investor optimism has ebbed away since Monday amid mounting US-China tensions over the coronavirus and political developments in Hong Kong. Moreover, healthcare experts have poured cold water on the more hyperbolic claims circulating about Moderna’s trial results. Futures are currently flat ahead of the US open, recouping losses of about 1% since this morning. In any case, what began as the best week in May seems less likely to end that way.
Although mass production of an approved coronavirus vaccine is still many months away (at least), and an effective vaccine may never be found (like for HIV), Moderna’s results sound promising. On Monday, the company announced that in phase I trials their candidate produced antibodies that were able to fight covid-19 without negative side effects being detected. Moderna are now moving to phase II and plan to conduct crucial phase III trials in July. (At phase III, the vaccine will be tested on a very large sample of patients.) Public information with which to assess the company’s phase I claims is scant, a point made by several vaccine experts in the healthcare publication STAT this week. However, Moderna are one of the leaders in mRNA-based vaccines, which are simpler to design and faster to manufacture than conventional vaccines. And they were quick off the mark. After the coronavirus was sequenced and made public in January, Moderna rapidly identified a ‘spike protein’ on the virus’ surface that could be a candidate for a vaccine. These proteins can be manufactured by mRNA once they have been encoded with the correct instructions. The modified mRNA can then be administered as a vaccine to patients in whom they produce spike proteins in abundance. The presence of the proteins then triggers an immune response in the body and the production of relevant antibodies. According to Moderna, these antibodies were able to combat the coronavirus in their phase I trial.
Whether Moderna have found the key that unlocks the lockdown threat is unknown. However, with 100 coronavirus vaccine trials underway, the race is on. Government money is pouring into research, and this has lifted the profile of many healthcare companies, peaking investor interest in the most innovative among them. Short-term there is no doubt that the healthcare sector will benefit from covid-19 and the public focus on health. However, the long-term outlook also looks positive. Few healthcare systems will emerge from the pandemic unscathed. The stresses and strains of the coronavirus crisis have exposed significant deficiencies in all of them in terms of structure and provision. For example, outside Asia no country appears to have had a diagnostics industry large enough to meet the demand for testing that a novel contagious illness like covid-19 necessitates. Despite the massive debts that have been accrued battling the economic fallout from the virus, and the looming risks of debt monetisation through inflation and/or painful austerity, healthcare spending seems likely to rise significantly in real terms in the years ahead. That this fiscal splurge will take place at a time of rapid sector innovation is the cherry on the investment cake. Therefore, we are convinced that a dedicated healthcare exposure is an excellent long-term position in client portfolios.
In other coronavirus-related news, Chancellor Merkel has decided to back a EUR 500bn pan-European recovery fund to mitigate the economic harm of ongoing social distancing and the lockdown measures across the continent. Crucially, she has now accepted that money doled out (principally to struggling Southern European states) will take the form of grants rather than loans. This U-turn comes at a time when Mutti is riding high in the polls for her handling of the coronavirus crisis, and she appears to be exploiting this political capital to do something deeply unpopular with much of her CDU base. That this move comes hot on the heels of the German Constitutional Court’s decision to question the legality of QE measures implemented by the ECB will not go unnoticed, and a political scrap seems likely. Beyond Germany, her erstwhile allies have not given up and Chancellor Kurtz of Austria has already stressed his country’s opposition to a funding model based on grants. All 27 EU states must agree to establish the fund, so there remains a chance that the terms will change once more. Nevertheless, the possibility of an EU-wide stimulus with fiscal transfers from North to South has compressed peripheral sovereign spreads and widened those in core Europe. Long-term, while fiscal transfers make an Italian exit from the union less likely they could become another source of Northern European resentment. Afterall, the UK’s relatively high net contribution to EU funds was one reason (among many) than sowed the Brexit seed. We therefore remain cautious on the continent’s political development and European risk assets.
The final subject for this week’s Newsletter is the constitutional crisis in Hong Kong. When coronavirus hit, rolling instability in the long-standing trade entrepôt took a backseat to the more pressing matter of rigorous handwashing. However, Xi Jinping’s long-term goal – i.e., the integration of Hong Kong within China under one system of censorious government – never wavered. This week, the National People’s Congress plans to consider a national security bill for Hong Kong that would ban “treason, secession, sedition and subversion” against the Beijing government, and ride roughshod over the territory’s political independence and liberal traditions. Pro-democracy activists have called for mass protests, which the draft law attempts to “prevent, stop and punish”. And two US lawmakers have already drafted legislation that would sanction Chinese officials should the bill pass the Party’s largely ceremonial parliament. The dispute seems poorly timed, given the dire international position that China has found itself in amid the spread covid-19, and with a US election approaching where the Chinese government has been cast as the bogeyman that all candidates love to hate. However, China fears that pro-Beijing parties will lose their majority at Hong Kong elections in the Autumn, so it is potentially now or never. Looking ahead, we expect sparks to fly throughout the summer and the gyre between the US and China to widen ever further as the new Cold War deepens, and the US presidential election race heats up.
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