Reopening may be good for the economy, but maybe not for risk assets?

While countries are starting to resume their activities, concerns remain among health experts about the possibility of a second Covid-19 wave if measures are lifted too fast. Germany, for example, has seen the virus’s reproduction rate rise above 1 after easing some restrictions in May. Although the number of new cases declined from four to three digits per day, an increasing reproduction rate means that the number of infected patients may rise exponentially later with further easing of measures. Since the reopening in May, Germany’s cases are up 16%. Denmark’s infection rate has risen to 0.9 from 0.6 after schools reopened. Patient numbers increased by about 7%. Even in places where containment was quite successful, infected cases could see an abrupt surge. Singapore, for example, witnessed a second wave in the latter half of March despite having been successful in containing the outbreak since the early days. Infections among the country’s 300,000 migrant workers, who are living in cramped dormitories where social distancing is almost impossible, soared. Since then, the total number of cases in Singapore has surged from about 1,000 cases to more than 20,000.

While most healthcare professionals agree that a second wave is probable, their views differ on the magnitude of the second wave compared with the first. Health officials in Germany and the US, for example, have cautioned that the number of infected individuals could surpass the peak levels in March and April. Others, on the other hand, suggest that governments’ control measures and changes in citizens’ behaviour could help reduce the speed of the next-round infection. For instance, most states in Germany have already required residents to wear face masks while doing activities in public spaces.

With uncertainties around the path to the pandemic’s cure and global economic recovery lingering, financial markets worldwide have seen money flowing out of risk assets into safer ones. Since bottoming in late March, stock markets around the world climbed sharply in response to the news of successful outbreak containment and lockdown easing in many countries in Asia and Europe. The MSCI World Index has rallied 24% since the trough on March 23. The S&P 500 index rose by 31% to reach 2,939.51 on April 29 before levelling off after a sharp correction. However, global equities were dragged down again by falling US stocks after the director of the National Institute of Allergy and Infectious Disease, Dr Anthony Fauci, announced on May 12 that the pandemic was not yet contained and a vaccine was unlikely to be ready by late August or early September. Consequently, the price of safer assets like US government bonds went up, sending yield to 0.60% from 0.71% on May 11. Elsewhere, Germany, Britain and Singapore saw their 10-year government bond yields fall as well. Similarly, the US dollar rose amid increasing demand for safer currencies. The US dollar index rose 1.3% in the two weeks since easing on May 1.

Recovery will also likely be uneven. China’s April data showed that after lockdown easing, industrial production expanded 3.9% year-on-year; however, consumption remained subdued with an ongoing contraction in retail sales at -7.5%. The key cause is the high unemployment rate, which rose to 6%. In the US, where several states started to relax their stay-at-home orders, data revealed that people were leaving their houses more often. The Apple Maps data suggested that driving activity went up to 75% of normal levels compared with 50% in April for the US average. Meanwhile, consumer spending stayed modest, with same-store retail sales contracting by 7.5% in the second week of May.

For Thailand, the number of daily new cases has dipped to single digits for more than two weeks, prompting the government to relax lockdown measures further to the second phase of the four-stage exit plan. Shopping malls and large construction material stores were to reopen yesterday. This, too, has raised concerns among health officials about the possibility of a second wave. According to Chulalongkorn University’s Head of the Centre of Excellence in Clinical Virology, new cases could easily jump if people fail to adhere to social distancing after the reopening. Anyhow, we see the possibility for a severe second wave to be quite small, given that most Thais have a careful nature: wearing masks, using hand sanitiser and avoiding physical contact with others. Also, the country’s high temperature could help reduce the life span of the virus compared with cooler environments. Nonetheless, uncertainties remain without a successful vaccine.

Reopening may be good for some sectors of the economy, but possibly worse for the financial markets due to the fear of premature easing and the second wave of infection. As vaccine development could take “at least a year and a half”, according to Dr Fauci, the economy seems set to reopen without a vaccine. Investors’ optimism for a quick recovery faded. Stock markets will likely run out of steam and are unlikely to rally with the same steepness. Some industries such as international travel and trade may take years to recover to pre-crisis levels. Social distancing measures will cap the capacity of services such as restaurants and barbers where customers have to be at least two metres apart, for example. On March 13, Fed chairman Jerome Powell said “additional policy measures” may be needed to avoid “deeper and longer recessions”. In addition, businesses may face tougher challenges after lockdown easing as their rents will be due in full, while customers are not back at a 100% level due to virus fears. Wuhan rent protests last month signalled a possible scenario of small businesses failing to keep up with the cost of reopening. From the grim economic numbers of widespread bankruptcy and high unemployment, we expect the recovery to be U-shaped rather than V-shaped. This could further dampen investor sentiment in the markets. Hence, proceed with caution.