As growth equity investors, our day job usually involves tracking down great companies that can win in areas of strong structural change. However, as absolute return investors, occasionally something comes along that forces us to take our head out of the company P&Ls to try and understand the risks associated with a large exogenous event. COVID-19 is clearly such an event.
Munro Partners has been tracking the Coronavirus daily since China confirmed the outbreak on January 20 in Wuhan Province. As an absolute return manager, we analyse the data and patterns to provide insight in terms of timing and ways to protect against the financial downside for our clients.
And we have noted a pattern.
Source: Worldometer, Munro Partners
Looking at our chart on confirmed COVID-19 cases by country, we can see a clear trend developing. Progression of confirmed cases by day (with t+0 at 100 cases on a country-by-country basis), we see that the rate of increasing cases (2nd derivatives) have an inflection point between 15 and 20 days. That is, from the time a country crosses 100 cases, it takes roughly 20 days to get the outbreak under control (new daily cases are less than the day before).
China Ex-Hubei is the longest test case with an inflection point at 20 days. While there were 127 cases at t+0 (1st point) increasing rapidly to 11,287 cases by t+20, a further 20 days later (t+40) there were “just” 1,784 new cases. A similar inflection point occurred in South Korea at t+17, whereby the daily number of new cases started to fall. While Italy is still experiencing rapid case increases to t+14, if South Korea and China Ex- Hubei is used as a reference point, we should expect to see an inflection point in new cases over the next week. That would be welcome good news.
However, based on these patterns, we can also expect to see rapidly increasing cases in the larger economies of the US, France, Spain and Germany over the coming two weeks as they enter the peak period of expanding confirmed cases.
For equity markets, this creates we expect a difficult juxtaposition. Will the market look to China, South Korea and hopefully Italy as evidence that the virus will ultimately be contained; or will they look at increasing confirmed cases in G7 nations and deduce the economic fallout from this shock is expanding?
To be clear, there are obvious testing, climate and cultural differences between each country we track, with Singapore (warm climate) the obvious outlier, and we don’t profess to be medical experts as to how the virus may evolve. But from our point of view, we would make two observations.
- The next few weeks will be crucial to containing the virus spread in developed economies and the economic fall-out could dramatically increase. And
- This can be contained. Countries have done it already, and long term this should ultimately create a good opportunity for investors.
But in the meantime, stay safe.
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good analysis. but i guess a lot will depend upon the size of the country and other geographic locations. like in Australia, WA is like a different country - so the inflection point in WA will come not when there are 100 cases in all of australia but rather in WA. Same in US, its just too big.. so this might go on for some time