Delta Variant – Setback or Derailment of the Recovery
The Covid-19 Delta strain is now driving a rebound in infections worldwide and fuelling concerns about whether the recovery underway in the global economy and financial markets will be derailed.
The honest answer is that it’s difficult to say with certainty how big a threat the Delta variant poses to the global economic recovery. The lesson to be taken from the past year is that the virus can evolve in ways that have consequences that are impossible to foresee in advance. Faced with such uncertainty, it is helpful to focus on what we do know, rather than what we don’t. Three things stand out to my team and me.
First, having fallen sharply from May’s peak, the number of daily global infections has started to climb again in recent weeks. This increase is concentrated in a handful of countries in Europe (the UK and Spain) and Asia, including Japan, Malaysia, Thailand, and Indonesia.
You can track Daily Global Infections at this link.
Second, the rise in cases is being driven by the spread of the Delta variant of the virus, which is now the dominant strain in many countries, among them the U.S., U.K., Australia, Spain, Indonesia and India. Given how contagious the Delta variant is, it is only a matter of time before case numbers rise in those countries where it now dominates.
Third, when it comes to assessing the implications for economies and financial markets, it’s important to keep in mind that
the economic hit is caused by measures to contain the spread of the virus rather than the virus itself.
What matters, therefore, is how governments and citizens respond to any increase in infections. It is important to keep in mind that while governments may not re-impose restrictions,
how people respond to increases in case numbers could potentially curtail economic activity.
Beyond this, things get more uncertain. The recent experience of the U.K. suggests there are reasons for optimism. The U.K. is in the midst of a surge in cases of the Delta variant, but the evidence so far suggests that vaccines have greatly reduced hospitalizations and deaths caused by Covid-19.
Overall, vaccinations in the developed world have been progressing well. While they have not reached the same levels as the U.K., they are on track to reach those levels in the next few weeks.
You can track Global Vaccination Rates at this link.
We believe that the spread of the Delta variant may temporarily exacerbate labour shortages as affected workers are forced to self-isolate. In addition, current supply chain disruptions and the resulting transitional inflation will continue for some time yet. However, we don’t believe that developed market governments should have to impose major new restrictions on activity that pose a major threat to economic recoveries. Current international travel restrictions will weigh heavily on tourist dependent economies such as Spain, Portugal, Greece, Australia, and New Zealand.
The main threat is in emerging markets (EMs) economies where vaccination rates remain low, and rollouts are progressing more slowly.
That includes almost all of Africa and parts of Asia and Latin America. While we don’t believe that the economic impact will be as bad as in previous waves as businesses and households have adjusted to the virus and social distancing measures, it may still have damaging repercussions.
Stepping back, even if the Delta variant doesn’t derail the global economic recovery, it is becoming increasingly clear that we are likely going to have to learn to live with Covid long term.
My team recently reminded me that it took nearly 200 years from the point when the first successful smallpox vaccine was created (Edward Jenner in 1796: Smallpox (who.int)) until it was eradicated from afflicting humanity. I don’t believe that it will take 200 years to eradicate Covid-19. However, it is clear that we will not get the upper hand until practically the entire world is vaccinated. For now, the link between infections and hospitalizations may have been weakened but, as vaccine efficacy wears off and new variants emerge, that may not remain the case. And, even if the nightmare scenario of a breakthrough variant fails to materialize, most scientists agree that “booster” shots are likely to be needed at some point, which could further lengthen the timeframe for the rollout of vaccines in EMs.
Households and the economies that they participate in are adaptable and, as such, we still expect that most will adjust to the reality of a long-term Covid presence. Hence, we believe that the global economy will eventually return to its pre-virus trend. But developments over the past few weeks are an important reminder that the path “back to normal” is unlikely to be smooth and different countries will proceed at different speeds.
While we are still anticipating a very strong recovery in the global economy by past standards,
we no longer expect equities and corporate bonds to outperform “safe” government bonds by a significant degree as we did a couple of quarters ago,
and we continue to forecast that some other “risky” assets, including most commodities, will struggle over the next couple of years
However, when it comes to most risky assets, a great deal of optimism already seems to be discounted in the current price. Expectations for corporate earnings are very strong, households and institutions are allocating an unusually high share of their portfolios to equities, and credit spreads are exceptionally low. Meanwhile, we think that growth in the U.S. may fall a little short of the extremely upbeat consensus projections. We also expect China’s slowing economy to lose more momentum. As such, we encourage investors to temper their expectations and the amount of risk there are taking in their portfolios.
As always, we encourage you to follow a sound financial plan and speak with your Advisor to ensure you are on track to meeting your investment objectives.
Sincerely,
Corrado Tiralongo
Chief Investment Officer
Counsel Portfolio Services | IPC Private Wealth
Counsel Portfolio Services | IPC Private Wealth
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