Over the past week it has been striking to see how investors
have reacted to the first signs that new COVID-19 cases in New York are starting to stabilize. While we
understand the desire for optimism, we also caution that the US outbreak is far from over. Recovering
from this acute period in the outbreak is just the beginning and not the end. We believe the path to
re-opening the economy is going to be long. It will require turning on and off various forms of social
distancing and will only come to an end when vaccines are available, in the spring of 2021 at the
earliest. With Italy finally turning the corner in its outbreak as the growth in new daily cases has
started to decline, the market has turned its attention to the US.
We argue that only after
we see (1) adequate surge capacity in hospitals, (2) broad public health infrastructure to support
testing for disease surveillance, (3) robust contact tracing to curtail “hot spots” and (4) widespread
availability of serology testing (blood tests to see who is already immune to the virus) can the US
confidently return to work. We see this happening in waves starting in mid-summer. Unfortunately, we
think there will still be a large number of workers not able to go back to work until a vaccine is
abundantly available as social distancing cannot be fully relaxed until we have herd immunity (~60% of
people vaccinated). Furthermore, large venues such as sports stadiums, concert halls and theme parks are
also likely to remain shut or have attendance capped at 10-25% of prior levels. This view on the delayed
peak and slow return to work has led our US economists to revise their US forecast to a return to
pre-COVID-19 levels not until 4Q21. Despite the significant concerns we raise about the path to a US
recovery, we continue to believe the market is underestimating the impact the drug pipeline can have on
the public policy response to the virus. We should stress that investors cannot afford to lose sight of
the fact that only a vaccine will provide a true solution to this pandemic. We also believe that
governments should invest in large-scale vaccine manufacturing prior to successful results for all viable
candidates despite some not making it to market. Only by building production capacity now can governments
provide the billions of vaccine doses we need to meet demand for the 2021 season. That said, in the
interim there are promising antivirals and antibody therapies in the pipeline with data starting in April
and continuing through the late summer. We believe that at least some of these drugs can be successful
and help to turn severe cases into milder forms of the disease. Such an outcome could reduce the
potential strain on hospitals and allow public health officials to support a broader re-opening of the
economy before a vaccine is available. Thus, with therapeutics available in the near term and a vaccine
on the horizon, the market could start to “look through” the slow US recovery and back to pricing in
future US growth.
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