Coronavirus Disease 2019 (COVID-19) Outbreak and Investing

The US equity markets have fallen sharply the past week on concerns of coronavirus diseases 2019. This novel coronavirus affects the respiratory system, was first identified in Wuhan, China more than two months ago, and has now spread to all major economies globally. The headlines have been worrying and often sensational, as many unknowns remain, and the American public is just starting to wrap their arms around the prospect that their life might be severely impacted by the virus spread. However, it is important for all of us to understand the facts of this unfolding crisis, maintain a healthy investment horizon, and act rationally. Though it is still too early to draw any definite conclusion, we understand that COVID-19 is a highly contagious but non-life threatening disease to a majority of the public. We believe its overall impact on China’s economy will be substantial but transitory, and its impact on the US economy will likely be rather limited. Last week, sentiment has turned from being complacent (pricing this as an isolated China event impacting mainly travel related industries) to being overly pessimistic (pricing this as a multi-year negative for most large cap US corporations). Similar to our thoughts during the Great Recession, we believe the right approach to navigate this period of heightened volatility is to stay calm, maintain a long-term investment horizon, invest in high quality, undervalued companies, and exercise disciplined rebalancing. This should remain particularly true for the Valuation 50 and Dividend strategy investors.

Background Information about COVID-19

  • Contagion: The current understanding is the virus mainly spreads from person-to-person who are in close contact with one another (within about 6 feet). It is transmitted via respiratory droplets, and when the droplets land in the mouths or noses of people who are nearby or possibly directly inhaled into the lungs. It may also be possible that a person can get COVID-19 by touching a surface or object that has the virus and then touching their own mouth, nose, or possibly their eyes. The COVID-19 virus is very contagious and because it is novel, few people have immunity against it. The odds for cured patients to be infected again are very low, however.
  • Severity: The mortality rate is currently around 3.5% for China which has ~80,000 of confirmed cases, and 4% for Hubei Province, the epicenter, which has ~65,000 confirmed cases. The mortality rate will likely decline, however, as many early deaths were a result of patients’ inability to get care in an overcrowded healthcare system in Hubei and healthcare providers’ lack of experience treating the diseases in the early days of the outbreak. The virus does put certain people under more risk, including people with compromised lung capacity due to a combination of poor air quality and smoking, and the elderly (70 and older), and the sick who have cardiovascular disease, diabetes, chronic respiratory disease hypertension, and cancer. According to the data from the Chinese Centre for Disease Control and Prevention (CCDC), ~81% of the cases have been mild, ~14% have been severe, and ~5% critical. Rare deaths were reported among mild and severe cases, while the fatality rate was nearly 50% among critical cases.
  • Treatment: There is currently no cure or specific antiviral treatment recommended for COVID-19. People with mild symptoms mostly recover without needing special treatment. For severe cases, treatment would include care to support vital organ functions. Separately, Gilead Sciences (GILD) announced last Wednesday it had begun two Phase 3 studies of its experimental antiviral treatment remdesivir, which is being tested as a Covid-19 treatment in two trials in China and one trial in the U.S. Health officials at WHO have expressed optimism about the possibility of remdesivir as a treatment for Covid-19 patients. Moderna (MRNA) developed an experimental coronavirus vaccine, which the company had shipped to the NIAID for testing in humans last week. The Moderna vaccine won’t be ready for mass scale utilization until at least spring/summer of 2021, however, even if it is proved effective.