Risks for stocks are elevated. Few would debate this. Valuations for Standard & Poor’s 500 stocks — according to data service provider FactSet, currently at 21.4 times forward earning — are higher than both the five- and 10-year averages of 18.1 and 16.2 times respectively.
Yet, US stocks have been inching inexorably higher this year — even though there is intermittent profit-taking — and leading global markets broadly higher. Case in point: The market saw another sharp selloff last Monday but recouped lost ground in the following days. All three major bellwether indices — the Dow Jones Industrial Average, S&P 500 index and Nasdaq Composite — remain not too far from all-time record-high levels.
A main reason behind last week’s volatility is fears that the Delta variant, which is driving a renewed surge in Covid-19 cases, will derail, or at least delay, the global economic recovery. Indeed, we are seeing the re-imposition of more stringent restrictions in parts of the world, particularly where the percentage of population vaccinated remains low.
Vaccine hesitancy is a real risk. As economies reopen, more and more people will come into contact with each other, making it easier for the virus to spread in the community. The number of infections will rise, as will hospitalisation, which will, in turn, dampen economic activity.
Positively, data shows that current approved vaccines remain highly effective against variant infections and, importantly, hospitalisation and death. So, we do not think rising new cases will significantly reverse economic reopening as countries ramp up vaccination efforts. Indeed, we believe it will be a Herculean political challenge for the Western world to revert to locking down its people who are fully inoculated. It simply is not happening.
That said, what we are now witnessing is a pandemic of the unvaccinated. Hopefully, those still hesitant on vaccine will be motivated to get the jab in the face of rising risks of infection and severe illness (see “Vaccination — the only way to save lives and livelihoods” for a more in-depth discussion).
The world must be prepared to live with the Covid-19 virus, which seems likely to become endemic. And vaccine remains the best protection one can have against it.
Besides vaccine hesitancy, there also appears to be work hesitancy in the US. News media have highlighted anecdotal evidence indicating a rising number of job vacancies despite a high unemployment rate, suggesting that many people are not actively looking for a job. Companies have had to raise wages and offer sign-on bonuses and perks to attract workers (see Charts 1 and 2).
We have written about this before. The labour shortage is likely to be due to a combination of factors, including generous government benefits and excess savings during the pandemic, concerns for contracting Covid-19 and/or childcare responsibilities (as long as schools and day care centres remain closed). People may have got so used to not having to work and still getting free money from the government that they prefer extended lockdowns. Interestingly, data also shows a surge in alcohol sales during the pandemic (see Chart 3). It remains to be seen how long these negative effects will persist — and, therefore, what is the longer-term impact on businesses, if any.
For now, overall sentiment for US stocks remains optimistic, underpinned by the strength in corporate earnings and modest inflationary expectations.
After falling 11.2% in 2020, earnings are rebounding very strongly — up 52.5% in 1Q2021 for the S&P 500 companies. Analysts have been repeatedly revising upwards their forecasts on the back of better-than-expected results. Heading into the reporting season for 2Q2021, earnings were expected to grow 63.3%, now revised to 69.3% following robust results from the financial sector (the first major sector to report) over the last week.
The 2Q2021 may be peak earnings growth — owing partly to 2020’s low base effect — but earnings will continue to grow for the foreseeable future, by an estimated 36.6% in 2021 (to well above pre-pandemic levels) and 11% in 2022. And as long as earnings continue to expand, we think stock prices will move higher.
Prices for many commodities may be peaking. Chip shortages, which have caused new and used car prices to surge, are widely expected to ease over the coming months. Recent agreement between Opec+ members to raise production output by 400,000 barrels per day each month (from August) to meet rebounding demand should also keep a lid on prices going forward. These will, in turn, temper inflationary pressures, which we still believe is mostly transitory, and alleviate the need for the US Federal Reserve to raise interest rates sooner than expected. In short, most indicators remain constructive for US stocks to perform in the near to medium term.
Over time, the Global Portfolio will have to consider the relative effect of a sharply divided world. Inequitable vaccine distribution has highlighted the chasm between the rich and poor. So, while major developed economies are reopening with quick vaccination rollout, many emerging countries are lagging far behind. That said, it is quite possible that, ultimately, vaccine take-up rates could lag in countries where “freedom of the individuals prevails over those of society” compared with those where society’s interest takes prominence. The percentage of population vaccinated will determine not only which countries can reopen and rebound faster, but also whether the recovery is sustainable, thereby giving them more enduring competitive advantages. We will revisit this subject in a future article.
Box Article 1: Vaccination — the only way to save lives and livelihoods
Vaccine hesitancy is real, perpetrated in part by deliberate misinformation by anti-vaxxers and conspiracy theorists. Many of these people point to a renewed rise in Covid-19 infections in countries that are most advanced in terms of vaccinating their populations as proof that vaccines do not work.
Yes, it is true that countries such as the UK, US, Israel, and Singapore are reporting a rising number of confirmed cases. This is driven by the reopening of their economic and social activities as well as by the more contagious Delta variant, which is rapidly becoming the dominant strain around the world (see Charts).
As we have written before, however, statistics have to be read in totality — no cherry picking. And what the data shows is that, despite the rising case numbers, hospitalisation and deaths remain low. This has to be the clearest evidence that the vaccine works! At the end of the day, it is about mitigating the severity of infections and deaths.
Let us be clear, and we repeat: The objective is saving lives and livelihoods; it is about lessening the severity of symptoms in people who are vaccinated and lowering the number of deaths. As the economy reopens and people must interact, positive cases may rise. But 98% are not severe, and this percentage will keep rising as more and more people are vaccinated.
A pandemic of the unvaccinated
In fact, when you drill down to more granular data, the emerging trend is even more compelling. According to a CNN report, using data collected by Johns Hopkins University, US states with less than half of residents vaccinated are reporting a substantially higher number of new cases — the 7-day average of 11 per 100,000 daily compared with four per 100,000 in states where more than half of their populations are vaccinated (the full report can be read here: https://edition.cnn.com/2021/07/17/health/us-coronavirus-saturday/index.html). More critically, an estimated 97% of the people recently hospitalised and 99% of those who died were unvaccinated.
Yes, you might still get infected after vaccination. No vaccine offers 100% protection, but it is most certainly not pointless. To quote Dr Anthony Fauci, director of the US National Institute of Allergy and Infectious Diseases and chief medical adviser to the President: “So, the vaccines are still very, very effective in preventing severe disease.”
Those who insist on being unvaccinated (for whatever reason) should know that their risk of infection, becoming severely ill or dying is higher than ever before. This global pandemic will turn into a pandemic of the unvaccinated. Why? Because economies are reopening. This is a fact. (You can read more here: https://www.npr.org/2021/07/16/1017002907/u-s-covid-deaths-are-rising-again-experts-call-it-a-pandemic-of-the-unvaccinated)
Reducing R by managing a combination of p and q
In our article last week (“R value: How it is determined”, The Edge Singapore, Issue 993"), we discussed in great detail R, the effective reproduction number. In summary, if R is above 1, the number of new infections will increase exponentially. Conversely, if R is below 1, then infection rates will gradually fall away. So, to keep the outbreak contained, the aim is to lower R to below 1. This is done by reducing the number of contacts among the people through restrictive movements and lockdowns (we call this p) and/or reducing the riskiness of infection in each contact between two persons (q). The latter can be achieved via face masking, physical distancing and, most effectively, vaccinations.
What every country has done thus far to lower R is a combination of p and q. Mathematically, the aim is for (1 – p) x (1 – q) ≤ 1 /R. For instance, if we keep p at 1 (complete lockdown), then R will drop even if people are not vaccinated. If p drops faster (owing to a relaxation of movement measures) than q rises (vaccination), then R will rise. This is what is happening in countries that are reopening too quickly.
Mathematically, a high R would still require some form of movement restrictions, p, to limit the number of contacts even as q rises rapidly. The problem is, there remains much uncertainty as to the implicit R, which may be clearer only many months later, at best. Currently, experts estimate R for the original strain in Wuhan, China, at 2.4 to 2.6; the Alpha variant at between 4 and 5; and the Delta variant as high as 5 to 8.
Two-speed strategies on lowering p
What we are seeing now are different approaches in terms of how fast to reopen as vaccination is ramped up. The US and UK have opted for a more aggressive relaxation of SOPs — with p approaching zero — and even doing away with face masking mandates. This is resulting in higher R, and cases are rising anew. As we are seeing, this is a dangerous strategy, especially for the unvaccinated. Singapore, on the other hand, is embracing the more prudent approach by taking it step-by-step in gradually lowering p — based on actual outcomes on the ground.
But deciding on which option is not necessarily up to science. It is also cultural, philosophical and political. We saw a massive “freedom” protest in France, as you would certainly see also in many Western democracies if people are not given the freedom to do as they wish soon. Covid-19 fatigue is real.
Is there a combination where everyone will be happy?
Until q approaches 1, any relaxation will result in more infections. It is inevitable. It is why we say vaccination is the silver bullet. It is so very, very important that we can get as high as possible a percentage of the population inoculated.
Increasingly, countries are leaning towards some form of discriminatory rules to differentiate between the vaccinated and unvaccinated — not only to boost vaccine take-up rates but also simply because the risk is going to get much higher for the latter group (and therefore needs more SOPs).
We know of people whose fear of contracting the virus and getting sick is so great that they will advocate keeping the country on complete lockdown — they are, particularly, the wealthy, who do not have to go to work and earn a living. At the other extreme, there are people who are so poor that they will die from starvation if they are not allowed to work for a living. The majority of us fall somewhere in between these two extremes.
Clearly, there is no combination where everyone will be totally happy. The government must manage the balance between lives and livelihoods. Leadership is about doing what is RIGHT.
- Box Article 1 Ends -
Box Article 2: Time for vaccine dividend measures
Let us give credit where credit is due. The steep ramp-up in Malaysia’s vaccination rate is a success story. The country is now administering 410,000 doses daily (on a 7-day average basis). This is a huge step up from the daily average of 170,000 just a month ago, in June.
In fact, Malaysia is now getting jabs into people’s arms at the fastest clip in the region (see Chart). As at July 21, a total of 15.5 million vaccine doses has been administered — 45.2% of the adult population have received at least one dose and 21.1% have been fully vaccinated.
Yes, mistakes were made — we could have obtained more vaccines and sooner — and, as a result, daily case numbers are high. In reality, few countries got the vaccines sooner because the bulk of a very limited supply available were taken up by the richest, developed countries such as the US, UK and members of the European Union. So, despite what some critics would like to say, our ability to speed up the rate of vaccination must be lauded. But we cannot rest on our laurels.
Malaysia must seize the initiative to further leverage this momentum — by rolling out vaccine dividend measures. In essence, what this means is that businesses and factories with fully vaccinated workers will be allowed to operate at full capacity. People who are fully vaccinated can go to shopping malls, cinemas and retail shops, dine in at restaurants, use public transportation and so on. All this would, in turn, accelerate the economic reopening and faster stimulate the recovery process.
Conversely, people who choose not to take the vaccine must be barred access to all of the above. This is to safeguard our healthcare system — already extremely strained in the last 17 months — because their risks of infection are higher than ever before, especially with the contagious variants. There are still 4½ million Malaysian adults who have yet to register for vaccines. Hopefully, these restrictions will motivate them to get vaccinated as soon as possible.
Based on our calculations, all 19 million people who have registered for the vaccine will get at least one dose by Malaysia’s National Day on Aug 31.
Many countries have implemented variations of such measures, to differing degrees.
In China, an increasing number of local governments is set to bar access to public venues, supermarkets, hospitals, gyms, banks, karaoke bars, cinemas, internet cafés and so on, while some cities will not allow children back to school if their parents are not vaccinated.
Hong Kong allows businesses such as restaurants and hotels with fully vaccinated staff to open for longer hours and operate at capacity. Fully vaccinated fitness coaches and their students can be exempted from wearing masks during exercise classes. Similarly, Singapore allows dine-in and high-intensity mask-off activities in groups of up to five vaccinated adults, and up to 30 fully vaccinated persons in a class.
France has implemented some of the toughest measures in the Western world, requiring a “Covid health pass” (proof of vaccination, negative test or recent Covid-19 recovery) to visit cinemas, museums, sports matches and other cultural venues. The requirements will be expanded to restaurants, cafés and shopping centres in August, as well as on planes, coaches and trains. In addition, all healthcare workers — in hospitals, nursing and retirement homes, even home-care nurses — must be fully inoculated or they will not be paid after Sept 15.
Despite protests over the last weekend, a recent poll shows the majority of the French agreed with the tough measures. On its heels, the Italian government too is looking to expand its own version of the “green pass”. Surveys also indicate majority support from its people in the face of rising cases as reopening gathers pace.
We can never make everyone happy, but leadership is about doing what is right for society as a whole. It is critical that we raise as much as possible the percentage of eligible people vaccinated — to achieve herd immunity that will offer protection to all, including children and those unable to be vaccinated, owing to genuine medical reasons. Vaccine dividend measures can help us get there as soon as possible. Ultimately, the only and most important goal is to save lives and livelihoods.
- Box Article 2 Ends -
The Global Portfolio declined 1.2% for the week ended July 21. The biggest losers were Taiwan Semiconductor Manufacturing Co (-5.2%), Singapore Airlines (-3.8%) and Walt Disney Co (-3.6%). On the other hand, Builders FirstSource (+7.1%), Home Depot (+2.2%) and ServiceNow (+0.7%) ended the week higher. Total portfolio returns since inception now stand at 58.7%. The Global Portfolio is still outperforming the benchmark MSCI World Net Return Index, which is up 53.8% over the same period.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
Photo: Bloomberg
