Be cautious on names linked to a Victorian re-opening

Our latest coronavirus research indicates that Victoria’s re-opening targets will be difficult to hit, and very difficult to maintain for long periods of time.

Victoria’s first significant reduction in restrictions will not occur unless cases fall below a 14-day average of less than 5 cases per day. Any real sense of normality will not return unless cases are held at 0 for at least two weeks. Its current strategy is thus rooted in elimination, which the rest of the world has largely rejected.

The difficulty in maintaining the initial target of less than 5 cases on a 14-day average, is evidenced by Finland being the only country across our analysis of 15 Western European nations to hit this metric, and it was only able to do so for 6 days.

Despite not seeing a significant amount of community transmission, NSW is also struggling to hit such low levels of transmission. New Zealand (who was thought to have eliminated the virus), and Queensland, are now both seeing community transmission.

Victoria thus appears to be operating under a framework that may see a recurrent yo-yoing in and out of lockdown measures. This is likely to be true even with a vaccine, as a vaccine is unlikely to completely eliminate the virus, but simply help to suppress its spread (as is the case for the seasonal flu vaccine). The only way to avoid yo-yoing in and out of restrictions, and return to any semblance of normality, is to instead abandon the target of elimination, and move to a more realistic strategy. This would allow for some spread of the virus, particularly amongst low risk groups, whilst strong protections can be maintained for high risk individuals, such as those in aged care homes.

As long as elimination remains the sole focus, significant sovereign risk remains for firms that are heavily linked to a re-opening of the Victorian economy.

As detailed in our 1 September Coronavirus report (“Areas of Europe & USA likely reaching herd immunity”), better opportunities may instead be found in offshore regions, where most nations have come to terms with the inevitable, and are now beginning to return to normal. This includes China, whose economy appears to now be firing on all cylinders, and the USA, which has seen over 10m new jobs created over the past 4 months.

Domestically listed companies that have strong exports (such as Australian miners), or significant operations in overseas geographies, may also see benefits from the re-opening of the global economy, as most nations reach, or near herd immunity. Regions such as Victoria, that continue with an elimination strategy, instead face a long and uncertain pathway back to normality.

This report is the third instalment in our ongoing Coronavirus analysis & outlook series, originally published on 11 September 2020.

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