Fear, anxiety, fatigue, frustration, desperation, grief and anger — we are all feeling at least some of these emotions as the Covid-19 pandemic drags on in a seemingly never-ending loop. To say that the past 16 months have been stressful would be a gross understatement, whether you are a large or small business owner, worker, parent or someone with elderly parents.
With emotions running this high, it is not surprising that the issue about management — or, rather, mismanagement — of the crisis has become intensely personal. Everyone has a view, whether it is to extend stringent lockdowns or relax restrictions, how to balance the trade-off between lives and livelihoods, when to reopen and what criteria to use as well as the dangers and consequences, and so on and so forth. Even more interestingly, all are absolutely certain they are right.
Quite frankly, many are simply stuck in echo chambers of their own choosing — where diversity of opinions, facts or arguments are swept aside with distrust and disdain. It is also human nature to place outsized weightage on perceived “wrongs” as compared to “rights”. This is why it takes years to build a sterling reputation but only one instance to destroy it all. We know there are people who are worse off financially and struggling, but equally, there are also opportunists who exaggerate the negative, if only in hopes of getting more handouts.
Perhaps the only place where we can measure the “on balance” view — where people are willing to accept a more rational view — is where they have to put their money behind their beliefs. And, in this, perhaps the stock markets may well be most indicative of what people truly believe.
The optimist’s case
The global economic recovery is well underway; in fact, it is doing better than initial expectations, based on recent upward revisions. The International Monetary Fund (IMF) raised growth estimates for 2021 to 6% in its most recent April update — up from 5.5% in January and 5.2% in October 2020. Global GDP is forecast to expand another 4.4% next year. Similarly, the Organisation for Economic Co-operation and Development (OECD) now projects this year’s growth to be 5.8%, up sharply from the forecast of 4.2% made in December 2020.
Yes, this recovery is uneven, driven by major developed countries, owing to their faster vaccination rollouts. But it is happening rapidly, as underscored by surges in commodity prices and logistics rates — demand is returning far more quickly than supply, which is being hampered by bottleneck issues, creating temporary shortages.
A case in point: The Baltic Dry Index (BDI) hit an 11-year high last week. The index measures the average prices paid for the transport of dry bulk materials (used in manufacturing) across more than 20 routes and is a leading indicator of economic activities (see Chart).
The pessimist’s case
On the other hand, the pandemic is far from over, especially in the developing world, where vaccination rates are slow. Worse, these countries are becoming fertile ground for virus mutations. In particular, new variants that are more contagious are now driving the high case numbers around the world, even in countries where vaccination rates are high.
For instance, the UK is reporting an increasing number of daily new cases, almost all of which are caused by the Delta variant. Israel reimposed the indoor mask mandate on June 25 — after lifting it just 10 days before that — to head off the worrying uptrend in Delta cases. Meanwhile, rising cases are being detected in the United Arab Emirates, mostly of the Beta and Delta variants. All three countries have among the world’s highest percentages of vaccinated populations. In Australia, Sydney recently announced a citywide, two-week hard lockdown to stem a surge in Delta cases. Major cities, including Perth, Darwin and Brisbane, have also imposed similar restrictions, though with slightly shorter durations.
All these developments are raising alarm bells. Pessimists believe vaccinations will lose the race against virus mutations. Therefore, the current burst of economic activities generated by reopening will falter and the world will soon fall back into widespread lockdowns. In other words, markets are too bullish!
Why we are fully invested
Markets clearly believe in the optimistic scenario — where vaccination of the world’s population will successfully contain the severity of infections (see Table). Even if the Covid-19 virus can never be completely eradicated, the majority of infected people will only be mildly sick and will make full recoveries. Just a small percentage will require hospitalisation and even fewer will die.
This will be similar to influenza — commonly called “the flu” — that occurs throughout the year in this part of the world and which would not cause most of us to bat an eye. The World Health Organization estimates that worldwide, there are three million to five million severe cases of the flu annually, resulting in 250,000 to 500,000 deaths.
Singapore recently unveiled a roadmap in preparation for the new normal, whereby Covid-19 becomes endemic. Once at least two-thirds of its population are vaccinated — probably with regular variant-modified booster jabs — the focus will shift from the daily reporting of new cases to monitoring hospitalisations and those that result in deaths, which is being done for the flu currently. There will be widespread testing at entry points, for instance, at international borders, workplaces, malls and schools — but for screening purposes as opposed to hard quarantine. The sick need only self-isolate at home. And the prescription? Plenty of rest and chicken soup.
As mentioned above, global institutions such as the World Bank, IMF and OECD obviously believe in this scenario too — that the unfolding economic recovery is sustainable, as underscored by their recent upward revisions in growth forecasts.
To quote Winston Churchill: “I am an optimist. It does not seem too much use being anything else.”
We too are optimists. Covid-19 is the first truly global pandemic of our lifetime. It is jarring and scary and countries have struggled to respond. But it is not the first the world has witnessed, neither will it be the last. Humanity has survived worse pandemics and diseases and will do so again, on the strength of our combined resilience, imagination and ingenuity. And this is why we are fully invested for our portfolio.
Box Article: Facts and feelings in the US
What we have articulated in the main article this week is that people’s feelings do not necessarily reflect what they truly believe. Let’s be honest. People say what they say for many different reasons — and there is usually an agenda. For example, someone would exaggerate or even lie simply because it grabs more attention. Sensationalism sells! Others may make things worse than they are in hopes of gaining sympathy and help.
To demonstrate this divergence, we looked at a qualitative study done by Pew Research Center, which surveyed 10,334 adults in the US in January 2021 (the full report can be found at https://www.pewresearch.org/social-trends/2021/03/05/a-year-into-the-pandemic-long-term-financial-impact-weighs-heavily-on-many-americans/).
Table 1 shows more than half (51%) of those surveyed said the economic impact from the Covid-19 outbreak would make it harder for them to achieve their financial goals. This includes 58% from the lower-income group, 50% from the middle-income group and even 41% from the upper-income group. Notably, 40% of those who have not experienced job/wage loss also felt the same way! Of those who said their financial situation was better than a year ago, 35% still claimed it would be harder to achieve their financial goals.
Now, compare this rather pessimistic picture with facts. Chart 1 shows statistics on net worth for US households from the Federal Reserve. A huge majority (80%) of US households saw stronger growth in their net worth in 2020 than in the past five years (2015 to 2019), on average. The remaining 20% of households still saw gains, albeit of a lower percentage.
Another example: The Pew survey also showed more people saying they saved less — all groups except for those in the upper income — versus the number of people who said they had saved more since the pandemic began (see Table 2). According to the US Bureau of Economic Analysis, however, US households have accumulated huge excess savings — on top of what they would have saved if the outbreak had not happened (using the average from 2016 to 2019) — through the pandemic (see Chart 2). According to estimates by Moody’s Analytics, the cumulative excess savings amounted to some US$2.6 trillion ($3.5 trillion). The excess savings are now fuelling the pent-up demand in consumer spending.
In fact, this Covid-19 pandemic has seen governments pushing out aid stimulus packages of unprecedented scale. As a result, the private sector is reporting fewer bankruptcies than the average year, pre-pandemic (see Table 3).
Meanwhile, public debt has risen sharply, with the debtto-GDP ratio higher than ever (see Chart 3). Put another way, governments have shouldered a lot of the financial burden in this pandemic. Governments worldwide are socialising private obligations. And this is the fact.
The Global Portfolio gained 0.3% for the week ended June 30. The notable gainers were Alibaba Group Holding (+6.2%), Taiwan Semiconductor Manufacturing Co (+3.5%) and Bank of America (+2.6%). At the other end, Awanbiru Technology (-6.7%), Singapore Airlines (-3.4%) and Builders FirstSource (-3.4%) were among the big losers in our portfolio. Last week’s gains lifted total portfolio returns to 58.2% since inception. We are still outperforming the MSCI World Net Return index, which is up 52.7% 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.