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On April 22, 2020, State Street Global Advisor investment experts Dan Farley (Investment Solutions Group), Paul Carthy (Fundamental Value Equity), Shalabh Gupta (Fundamental Growth & Core Equity) and Sprague Rient (Global Fixed Income, Currency & Cash) shared their perspectives on medical developments around the COVID-19 virus and the impact these developments can have for investors.
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.
What investment opportunities the current environment suggests for healthcare equities.
From a value equity approach, we look to identify companies where their share prices are inconsistent with their long-term earnings power. Large parts of the healthcare sector expensive relative to long-term history and the sector is a potential target for cost savings down the road to off-set COVID-19 healthcare spend. We focus on sustainable earnings power. This means we are hesitant to invest in a stock solely on an opportunity in COVID therapeutics. With >260 therapeutic programs being worked on, including >70 vaccines, trying to pick a long term winner is difficult for example a successful vaccine would erode therapeutic product sales in time . The pandemic did expose insufficient critical care capacity – which is likely to be addressed longer term through increased expenditures on strategic reserves of equipment etc. Market weakness could provide an opportunity to build a position in suppliers with strong balance sheets which can weather the storm, resilient franchises which likely to benefit from this increased investment in healthcare equipment whose long-term earnings power remains intact and - which are trading at a discount to their history & peers.
What other investment impacts are on the horizon.
From a growth perspective, we believe Healthcare reform and the debate over drug pricing have kept related stock multiples under pressure. The COVID-19 crisis should allow for a breather, and we could see multiples expand in the space. Our proprietary CQ framework which is part of our disciplined and robust investment process allows us to look for high-quality companies, innovation driven sustainable growth and strong upcoming catalysts. Dislocations today are allowing us a good opportunity to identify key names using these metrics. New growth areas and investing fields could open up post COVID, e.g., infectious disease-focused companies or telemedicine companies and we are continuing to monitor these closely.
The key data points to watch in the future.
We are watching data from clinical trials, availability of testing and implementation of contact tracing. We are also closely watching the experience of economies that are being re-opened. Longer term, we are looking for clearer information on the disease itself, progress on vaccines, and development of manufacturing capacities to produce a vaccine. From an investment perspective, Fundamental Value Equity has used screening tools which monitor more than 400 health care companies globally for more than a decade. This is combined with deep fundamental research on individual companies, we continue working to identify companies whose the share price is at odds with their long-term earnings power.
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