Featured areas of discussion included:
How State Street’s macroeconomic view of the crisis is evolving.
We expect second quarter numbers to be very challenging. That said, we expect full-year US GDP growth to be between zero and -10%. Our view is based on the peak in cases following a 3-4 month path (as we’ve seen in other countries without a major reacceleration), an economy that had been on reasonable footing entering the crisis, and significant monetary and fiscal stimulus
Best case timelines related to medical advancements that investors should be paying attention to.
Anti-virals: Gilead’s Remdesivir trial will provide data in the next 2-3 weeks. Testing: molecular diagnostic and serology testing are expected to be manufactured with broad availability by end May/end June timeframe. Vaccines: 6 vaccines are in human trials, 81 others are in pre-clinical evaluation. mRNA approach is new and potentially higher risk, with a faster path (first use potential 4Q20 for limited at risk population); traditional development approach takes longer (e.g. JNJ vaccine potential first use 1Q21); both must clear a high safety bar set by the FDA.
Leveraging industry expertise in drug development and process scaleup, we also feel that getting a treatment option should be quite possible. We have done significant diligence internally and talked to key executives in Biopharmaceuticals and feel that because the Virus has a consistent spike protein that doesn’t mutate yet, we should be able to get a treatment option sooner than later. Anti-virals have already shown encouraging date as shown in the University of Chicago study and NEJM article. This also makes us more constructive that we might be able to get even better treatment options in form of antibodies in the near term. Vaccines could be a little distant in terms of timing because FDA will need to be quite thoughtful in approving these and might need longer term studies. We also believe that manufacturing and scaleup to supply the world should be feasible, although not an easy feat.
Market outlook on testing.
We believe the market is too sanguine on testing over the near term. Besides not testing enough, virologic tests can produce up to 25% false negatives and even the most sophisticated diagnostics companies have experienced problems with quality. Similarly, antibody testing has not been properly calibrated to the general population and many statistical accuracy claims are based on samples within the hospital setting only. In fact, just this weekend, the WHO cautioned on antibody testing, largely due to the risk of creating false confidence in the results – and specifically warning that antibodies do not confer immunity.
And finally, lets not forget that areas that are beginning to reopen (Germany) have tested much more and even some countries (Singapore) with very aggressive testing and containment measures have had to backtrack.
How timelines for societal impacts might play out, e.g., loosening of restrictions.
Regions, states, and cities will resume activity on different timelines, which makes sense given that the epidemic has not affected all equally. Most re-openings will attempt to balance risk of transmission with the degree of necessity. Large parts of economic activity such as dining, retail, and transportation aren’t likely to return to past capacity or productivity for a long time. Much more testing for current infections is an absolute prerequisite for loosening restrictions; additional criteria include hospital preparedness and the means for aggressive contact tracing. Unfortunately, the US does not meet these criteria now; we will likely be better positioned in a few months.
What investment opportunities the current environment suggests for bonds.
In actively managed Investment Grade fixed income, we focus on durable business models, strong balance sheets, and astute management teams. This is balanced with returns on a risk-adjusted basis. We are generally cautious on areas being hit by lower healthcare utilization trends, given the asymmetric payoff profile of the asset class compared to equity. We are also considering effects such as the impact on health insurers and hospitals of people losing employer-sponsored healthcare, e.g., what this means for reimbursement. Outside of healthcare, we are considering which areas might benefit from increased financial and social support brought about by the CARES Act.