In the AFR today I reflect on the question of when Victoria's COVID-19 crisis will peak, and the ramifications for financial markets, and securitised portfolios of home loans, SME loans, and consumer loans (ie, ABS/RMBS) in particular, which are suffering from large unofficial arrears. Read the full column here or AFR subs can click here. Short excerpt below:
Apparently the Victorian government is secretly predicting that their COVID-19 crisis will not peak—in terms of the daily number of new cases—until the final week of August when reported infections will reach 1100 persons per day.
In early July our proprietary COVID-19 models forecast a very different outcome with a peak expected sometime between July 13 and July 26 depending on how good the Victorian government was at thwarting transmission. These models combine the historical Victorian COVID-19 infection trajectory with a future path that conditioned on the containment experience in other countries with serious outbreaks. The models then enable us to discount the Victorian government’s containment efficacy to allow for policymaking error. If we predicated our Victorian forecast on, individually, the Italian, South Korean, Chinese, British, German or French paths, a reasonable downside case appeared to be around July 26.
Based on the current daily case-count published by the Victorian government it is possible this range was within three to ten days of the ultimate peak. While daily cases are being constantly reviewed, it appears that Victoria may have been cresting on either July 29 when the first 700 plus figure was published (subsequently revised down to 680 cases) or on August 4 when there was another big count of 725 cases that has since been revised down to 710. Unless we get another large tally, which is entirely plausible, one of these two days is a candidate for the peak.
The Victorian COVID-19 experience will ultimately be determined by the people living in the state and, in particular, the decisions of their government. After our models anticipated the original flattening of the curve at the start of April in Australia—months ahead of epidemiological projections—we expected there would be outbreaks but not a big second wave of the kind that has wrought Victoria.
Alongside New Zealand, seven Australian states and territories got it right—one looks to have made a sequence of heinous policy mistakes, which now risks undermining the work done by New South Wales. Some of these errors beggar belief: like the Victorian contact tracers—to the extent there were many to begin with—being told to stop using the data provided by the government’s COVIDSafe app, which has been reportedly effective in New South Wales.
There is a lesson here for all investors, and that is the importance of accounting for the possibility of irrational decisions from policymakers to whom we often impute the crucial yet rubbery assumption of decision-making integrity. This was an important learning for us in the first week or two of March when we thought it was obvious that central banks would have to immediately launch aggressive quantitative easing. In practice, it took them several weeks longer to read the writing on the wall.
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Thanks Chris, Are Major banks Hybrids at risk in your view with increasing arrears/defaults on the horizon or are you comfortable the major are adequately funded/capitalised? Thanks