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Coronavirus: muted long-term impact despite rapid spread

Karen Andersen, CFA  |  10 Mar 2020Text size  Decrease  Increase  |  
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COVID-19, the disease caused by SARS-CoV-2 ("coronavirus"), is spreading across the globe, leading to sharp market corrections and fears of triggering a global recession.

Risks relating to the fallout from the spread of coronavirus pushed the Federal Reserve to cut the target rate by 50 basis points on 3 March, to the 1-1.25 per cent range, and President Donald Trump signed an US$8.3 billion spending bill to fight the coronavirus on 6 March.

The virus emerged in China, where the government quickly weighed the economic and human costs of the rapidly transmitting new coronavirus (in the same family as the much more deadly SARS and MERS viruses) and in January decided to focus on stopping the spread of the disease, regardless of the short-term economic hit.

While responses beyond China will likely be more measured, we expect to see school closures and recommended telecommuting as precautionary measures in the US, given the recent rapid spread of the disease.

Overall, we see a weighted average hit of 1.5 per cent to 2020 global GDP and 0.2 per cent to long-run global GDP. We forecast a muted long-term impact because damage to productive capacity will be small, plus economic confidence should quickly return once the virus subsides.

Our long-term China GDP forecast is unchanged. We have lowered our 2020 China GDP forecast by 250 basis points, but we expect catch-up growth in following years.

We assume a global fatality rate in our base case of 0.5 per cent among those infected, higher than seasonal flu and recent pandemics like the 2009 swine flu, but much lower than levels reported to date (as diagnosis improves). We expect even lower fatality rates for developed countries (more ICU beds per capita, best practices) and the working age population (the disease is most severe in the elderly).

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We see reason for optimism surrounding vaccines and treatments. We should see initial data from Gilead Sciences' remdesivir by April; this could be a strong defence for patients with severe disease, and we raised our Gilead's fair value estimate slightly to US$85 per share. Among vaccines, Moderna is most advanced, but we don't expect use until 2021.

'Severe but manageable flu': Treatments on horizon

In our base case, we see treatments like Gilead Sciences' remdesivir becoming available before a potential second wave in the fall, which should alleviate capacity constraints at hospitals.

We include a placeholder for remdesivir in our model, however, we do not assume sustainable long-term sales, as we would expect the disease to either become more mild with time (like flu pandemics) or see no recurrences after the 2020 impact.

If this does become a moderate to severe annual threat, we assume vaccines will be available by the 2021-22 virus season.

Pandemics: Novel, widespread outbreaks with key similarities (and differences) from the flu

A pandemic is defined as a disease that can infect and sicken humans, can transmit easily from one human to another, and has spread worldwide. Viral pandemics—which historically have been influenza pandemics—are more contagious than seasonal flu.

Pandemics occur when a new form of virus emerges (either a mutated version or a combination with another variation) and is capable of transmitting from person to person. While the World Health Organisation has not officially deemed coronavirus a pandemic, it is likely moving in that direction.

What makes pandemics particularly dangerous is that the population generally does not have immunity to the disease, and this can cause outbreaks beyond the traditional winter flu season. Flu pandemics have decreased in severity with time, perhaps partly due to viral preference for diseases that are very transmissible but not lethal.

Despite some similarities between seasonal and pandemic flu, there are also key differences, as shown in Exhibit 1. While seasonal flu is every year, pandemics can have multiple waves; Spanish flu came in three waves, and the 2009 swine flu had two waves.

How a pandemic compares with seasonal flu

How a pandemic compares with seasonal flu

Source: Morningstar, HHS Pandemic Influenza Plan, 2017. 
*Seasonal incidence of symptomatic influenza in the US

Past pandemics have varied substantially in their lethality. For example, the 1957 Asian flu, considered a moderate pandemic, emerged in China in February 1957, reached the US by June, and spread very rapidly in the fall in the US and Europe, with the return to school seen as a significant driver for starting new community epidemics during that pandemic.

With mitigation efforts focused on a vaccine (which was developed too late and was not more than 60 per cent effective), most schools remained open and no travel restrictions or restrictions on social gatherings were undertaken, and 25 per cent of the US population was infected.

The 1968 Hong Kong flu was milder but more widespread (estimated at almost 40 per cent of the US population infected). The death rate may have been significantly lower than Asian flu because patients had some pre-existing immunity.

is a healthcare strategist for Morningstar.

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