The Covid-19 pandemic has greatly affected lives and livelihoods. And, we think, it will have consequences that will persist long after the virus ceases to be a deadly threat. There will be permanent changes to people’s behaviour and business decisions — for better and for worse.
We have written extensively on how vaccine distribution inequality is creating a two-track recovery for the global economy. Developed countries are speeding ahead with economic reopening and on track to surpassing pre-pandemic GDP levels within the year. Meanwhile, much of the developing world remains unvaccinated and at risk of a Covid-19 variant resurgence and are experiencing patchy and slower economic recoveries. The divide between the rich and poor is clear and growing.
That said, we also wonder if reopening strategies go beyond just vaccination rates. A case in point: Singapore and China rank among the world’s most highly vaccinated countries — 82% and 71% of their populations are fully vaccinated respectively. This is much higher than that in the UK (66%) and US (55%) (see Chart 1). Yet, both Asian countries have, thus far, remained very much focused on containment measures. China is adhering closely to its zeroCovid strategy while Singapore, despite all the talk of treating Covid-19 as endemic, decided to tighten restrictions in response to the latest community outbreak. In contrast, the UK and US lifted all pandemic restrictions months ago, with no sign of reversing even when cases and deaths are rising quickly in the case of the latter.
Are Singapore and China “victims” of and beholden to their earlier success in containing the outbreak? Or is the divergence in reopening strategies due to some fundamental cultural differences between the East and the West? We do know that Asians are generally more accepting of the view that public health must take priority over individual freedom. But are there also deep differences in our attitudes (fear and acceptance) towards death?
The Google mobility statistics seem to suggest that this may indeed be the case. In the US, UK and Germany, for instance, traffic for retail and recreation has recovered faster than that for workplaces. Of course, this could be the effect of generous Covid-19 assistance packages — which means not having to work — and perhaps also due to a higher prevalence of workfrom-home culture compared with that in Asian countries. In any case, habits will take time to change. The reverse is true in Singapore, Hong Kong and Taiwan, where mobility at workplaces is higher than for retail and recreation, where it is more a function of choice (see Charts 2 to 7).
Another interesting example: Singapore’s fatality rate from Covid-19 is quite consistently lower than that in the UK and US. However, its hospitalisation rate (as a percentage of confirmed positive cases) is far higher (see Charts 8 and 9). We think it is this higher-than-normal admission rate — which threatened to overwhelm its healthcare system — that led to Singapore’s backtracking on its reopening measures.
Granted, the city state may be a relatively unique case. The country is wealthy, with a very good healthcare system. At the same time, homes are generally small and, often, multigenerational families live under the same roof. Thus, it made sense for those who tested positive to quickly admit themselves, even if they were asymptomatic or had only mild symptoms. Hospital bed utilisation rose sharply through September (see Chart 10).
To augment hospital capacity, the Singapore government has since set up two types of intermediate facilities — Covid-19 Treatment Facilities (tier 2) and Community Care Facilities (tier 3) — for patients with mild symptoms and/or underlying medical conditions as well as for those ineligible for home recovery (tier 4). With these in place, perhaps reopening plans will get back on track in the near future.
Whatever the reasons may be, we think the disparity in reopening strategies between the West and Asia — and especially if this will translate into more start-stop in economic activities with future variantdriven localised outbreaks — will have long-term consequences on global trade, investments and jobs that will outlast the pandemic. And that will quite possibly further widen the rich-poor divide.
The pandemic is a moment of reckoning for three decades of near unfettered globalisation, which is now manifesting in severe supply chain disruptions — both in terms of production and logistics — and shortages across a wide range of goods.
For instance, automakers in the US and Europe have, for months, had to partially shut down plants and sharply curtail production, owing to a global chip shortage. Multinational consumer giants such as Nike and Adidas are expected to suffer big losses in sales, owing to factory shutdowns and stringent lockdown measures in Vietnam. Meanwhile, retailers such as Walmart and Target are scrambling to unsnarl a logistics gridlock to stock shelves with toys, games and other consumer products ahead of the all-important holiday season.
Costs are escalating because of an unsynchronised reopening of economic activities and borders, shipping disruptions — stemming from container and labour shortages to port congestions — as well as rising fuel prices. The disruptions to the complex global supply chains could drag on for years instead of months. As a result, inflationary pressures may not be as transitory as initially expected.
We suspect the pandemic will succeed where protectionism and populism have thus far failed — in driving manufacturing reshoring in developed countries — by hitting where it hurts most: corporate profits.
A case in point: The US and European Commission are rolling out major funding and incentives to promote domestic chip development and production, after years of relying on manufacturing facilities in lower-cost Asian countries. Massive battery factories for electric vehicles are being planned across Europe and the US. Currently, the majority of battery production capacities are in Asia, particularly in China.
This trend for reshoring will be further driven by digital transformation. Rapid advancements in artificial intelligence, automation and robotics mean that labour as a cost component will be increasingly smaller. Similarly, developments in 3D printing and demand for customisation will reduce the benefits of economies of scale in assembly line manufacturing. In short, the availability of cheap labour becomes a less important factor in the decision-making process for investments.
We do not think it will result in a fullscale reversal in globalisation, but we will see a shift in global trade. And that will translate, to a certain degree, into a reverse flow of investments and job creation, back to developed economies.
In addition, as we have written before, the larger capital markets such as the US will increasingly attract more fund inflows as liquidity and premium valuations create their own positive feedback loop and smaller markets will be progressively marginalised.
All of the above does not bode well for emerging economies. It means that emerging countries that are heavily reliant on foreign direct investment and exports to drive their economic development and lift millions of people out of poverty will have to rethink their longer-term strategy and relative competitiveness.
That said, the pandemic is also an opportunity — one that Malaysia must capitalise on to reform the underlying structural weakness that has long plagued the economy. As Winston Churchill once said, “The pessimist sees difficulty in every opportunity. The optimist sees opportunity in every difficulty.”
As a timely reminder, pharma giant Merck has just announced a new oral antiviral treatment that cuts the risk of hospitalisation by half and results in zero death in trial groups of Covid-19 patients. This is the first oral treatment (in pill form) found to be effective against the coronavirus. It costs US$700 ($953) per treatment course, or about one-third the costs for monoclonal antibodies, which though more effective are significantly harder to administer (through an intravenous infusion in a medical setting). Importantly, it is unlikely to be the last. Indeed, results from clinical trials for two other antiviral pills, being developed by Pfizer and Roche, are expected within months. This is why we will never bet against humanity, whose ingenuity knows no bounds. And it is precisely why we are optimists.
For all of the reasons articulated above, along with the imminence of effective treatments for Covid-19, it is imperative for developing countries such as Malaysia — where risks are low, given the high percentage of population vaccinated — to accept the trade-off to fully reopen sooner rather than later. A full reopening instead of piecemeal relaxation will also help change people’s mindset, to shift away from crisis mode. Yes, it may mean having to accept the consequences of higher mortality — because further prolonging lockdowns will cause losses to jobs in ways that we may not recover from.
The Global Portfolio was up 0.4% for the week ended Oct 6, led by gains from Microsoft (+3.2%), Bank of America (+2.7%), and Alphabet (+2.4%). Meanwhile, Alibaba Group Holding (-7.4%), Johnson & Johnson (-2.5%) and Taiwan Semiconductor Manufacturing Co (-2%) were among the big losers. Total returns since inception now stand at 60.8%, outperforming the benchmark MSCI World Net Return Index, which is up 53.2% over the same period.
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