In the context of diverging Covid strategies, reopening progress and economic recoveries across the region, the investment implications are similarly nuanced.
The emergence of various mutations, especially the Delta variant, has complicated the global reopening dialogue.
The Delta variant is estimated to be 60% more transmissible, with a reproduction rate of 6-7, nearly 3 times that of the original strain.
In recent days, further studies from the UK and Israel have showed that existing vaccines may have lower efficacy towards the Delta variant, and that vaccine protection could wane over time.
This has led to questions on whether herd immunity, which was previously thought to be within sight, is achievable.
In Asia, the arrival of Delta has upended many re-opening plans and caused more economies to revert to more restrictions.
It has also ignited a lively debate on the cost and benefits of the region’s apparently lower tolerance of COVID, including some that pursue ‘COVID zero strategies’, compared with countries like the UK, and the U.S..
The difference in each economy’s strategies is likely informed by a mix of factors, such as the state of the healthcare infrastructure, economic structure, governance capabilities as well as cultural differences.
For example, economies that have more specialized healthcare infrastructure, can afford to have some degree of constant hospitalization, while in other economies the risks of hospitals being overwhelmed is greater.
Economies that are manufacturing-led, rather than services-led can afford to have stricter mobility rules without jeopardizing economic growth.
There are also differences in government capabilities, as well as how each community views the role of public health policies and government in this pandemic.
While there are obvious benefits to preventing the spread of this deadly disease through strict measures and containments strategies, the ongoing economic costs of such “zero Covid” strategies are becoming more apparent.
First, international travel could take a much longer time to recover.
This could have implications for economies that are dependent on tourism; in Asia, Thailand stands out as having the greatest reliance on tourism.
Second, recurring mobility restrictions are both negatively impacting consumption, particularly of services, as well as disrupting supply chains. Already mounting frictions on international logistics, due to the difficulties of deploying crew and containers in de-synchronized global vaccination and quarantine standards, are being exacerbated by Delta. This will put further upward pressures on the cost of production in coming months.
Will the world have to ‘live with COVID’ and if so what does that look like?
The debate will likely continue in the near term. Public health officials suggest a few key elements are necessary for a successful ‘live with COVID’ strategy, such as a combination of high vaccination rate, effective system of testing and tracing, and strong healthcare infrastructure.
For most economies in Asia, getting there will require more policy commitment and investment. Taiwan, Australia, New Zealand may opt to wait until vaccination rate picks up, whereas China will require a mix of higher vaccinations and policymaker willingness.
The rest of Asia, such as India and Southeast Asia (excluding Singapore) also may not meet these optimal conditions any time soon, but could nonetheless pivot earlier out of economic considerations. The emergence of various mutations, especially the Delta variant, has complicated the global reopening dialogue.
The Delta variant is estimated to be 60% more transmissible, with a reproduction rate of 6-7, nearly 3 times that of the original strain.
In recent days, further studies from the UK and Israel have showed that existing vaccines may have lower efficacy towards the Delta variant, and that vaccine protection could wane over time.
This has led to questions on whether herd immunity, which was previously thought to be within sight, is achievable.
In Asia, the arrival of Delta has upended many re-opening plans and caused more economies to revert to more restrictions.
It has also ignited a lively debate on the cost and benefits of the region’s apparently lower tolerance of COVID, including some that pursue ‘COVID zero strategies’, compared with countries like the UK, and the U.S..
The difference in each economy’s strategies is likely informed by a mix of factors, such as the state of the healthcare infrastructure, economic structure, governance capabilities as well as cultural differences.
For example, economies that have more specialized healthcare infrastructure, can afford to have some degree of constant hospitalization, while in other economies the risks of hospitals being overwhelmed is greater.
Economies that are manufacturing-led, rather than services-led can afford to have stricter mobility rules without jeopardizing economic growth.
There are also differences in government capabilities, as well as how each community views the role of public health policies and government in this pandemic.
While there are obvious benefits to preventing the spread of this deadly disease through strict measures and containments strategies, the ongoing economic costs of such “zero Covid” strategies are becoming more apparent.
First, international travel could take a much longer time to recover.
This could have implications for economies that are dependent on tourism; in Asia, Thailand stands out as having the greatest reliance on tourism.
Second, recurring mobility restrictions are both negatively impacting consumption, particularly of services, as well as disrupting supply chains. Already mounting frictions on international logistics, due to the difficulties of deploying crew and containers in de-synchronized global vaccination and quarantine standards, are being exacerbated by Delta. This will put further upward pressures on the cost of production in coming months.
Will the world have to ‘live with COVID’ and if so what does that look like?
The debate will likely continue in the near term. Public health officials suggest a few key elements are necessary for a successful ‘live with COVID’ strategy, such as a combination of high vaccination rate, effective system of testing and tracing, and strong healthcare infrastructure.
For most economies in Asia, getting there will require more policy commitment and investment. Taiwan, Australia, New Zealand may opt to wait until vaccination rate picks up, whereas China will require a mix of higher vaccinations and policymaker willingness.
The rest of Asia, such as India and Southeast Asia (excluding Singapore) also may not meet these optimal conditions any time soon, but could nonetheless pivot earlier out of economic considerations.
The Delta variant is estimated to be 60% more transmissible, with a reproduction rate of 6-7, nearly 3 times that of the original strain.
In recent days, further studies from the UK and Israel have showed that existing vaccines may have lower efficacy towards the Delta variant, and that vaccine protection could wane over time.
This has led to questions on whether herd immunity, which was previously thought to be within sight, is achievable.
In Asia, the arrival of Delta has upended many re-opening plans and caused more economies to revert to more restrictions.
It has also ignited a lively debate on the cost and benefits of the region’s apparently lower tolerance of COVID, including some that pursue ‘COVID zero strategies’, compared with countries like the UK, and the U.S..
The difference in each economy’s strategies is likely informed by a mix of factors, such as the state of the healthcare infrastructure, economic structure, governance capabilities as well as cultural differences.
For example, economies that have more specialized healthcare infrastructure, can afford to have some degree of constant hospitalization, while in other economies the risks of hospitals being overwhelmed is greater.
Economies that are manufacturing-led, rather than services-led can afford to have stricter mobility rules without jeopardizing economic growth.
There are also differences in government capabilities, as well as how each community views the role of public health policies and government in this pandemic.
While there are obvious benefits to preventing the spread of this deadly disease through strict measures and containments strategies, the ongoing economic costs of such “zero Covid” strategies are becoming more apparent.
First, international travel could take a much longer time to recover.
This could have implications for economies that are dependent on tourism; in Asia, Thailand stands out as having the greatest reliance on tourism.
Second, recurring mobility restrictions are both negatively impacting consumption, particularly of services, as well as disrupting supply chains. Already mounting frictions on international logistics, due to the difficulties of deploying crew and containers in de-synchronized global vaccination and quarantine standards, are being exacerbated by Delta. This will put further upward pressures on the cost of production in coming months.
Will the world have to ‘live with COVID’ and if so what does that look like?
The debate will likely continue in the near term. Public health officials suggest a few key elements are necessary for a successful ‘live with COVID’ strategy, such as a combination of high vaccination rate, effective system of testing and tracing, and strong healthcare infrastructure.
For most economies in Asia, getting there will require more policy commitment and investment. Taiwan, Australia, New Zealand may opt to wait until vaccination rate picks up, whereas China will require a mix of higher vaccinations and policymaker willingness.
The rest of Asia, such as India and Southeast Asia (excluding Singapore) also may not meet these optimal conditions any time soon, but could nonetheless pivot earlier out of economic considerations. The emergence of various mutations, especially the Delta variant, has complicated the global reopening dialogue.
The Delta variant is estimated to be 60% more transmissible, with a reproduction rate of 6-7, nearly 3 times that of the original strain.
In recent days, further studies from the UK and Israel have showed that existing vaccines may have lower efficacy towards the Delta variant, and that vaccine protection could wane over time.
This has led to questions on whether herd immunity, which was previously thought to be within sight, is achievable.
In Asia, the arrival of Delta has upended many re-opening plans and caused more economies to revert to more restrictions.
It has also ignited a lively debate on the cost and benefits of the region’s apparently lower tolerance of COVID, including some that pursue ‘COVID zero strategies’, compared with countries like the UK, and the U.S..
The difference in each economy’s strategies is likely informed by a mix of factors, such as the state of the healthcare infrastructure, economic structure, governance capabilities as well as cultural differences.
For example, economies that have more specialized healthcare infrastructure, can afford to have some degree of constant hospitalization, while in other economies the risks of hospitals being overwhelmed is greater.
Economies that are manufacturing-led, rather than services-led can afford to have stricter mobility rules without jeopardizing economic growth.
There are also differences in government capabilities, as well as how each community views the role of public health policies and government in this pandemic.
While there are obvious benefits to preventing the spread of this deadly disease through strict measures and containments strategies, the ongoing economic costs of such “zero Covid” strategies are becoming more apparent.
First, international travel could take a much longer time to recover.
This could have implications for economies that are dependent on tourism; in Asia, Thailand stands out as having the greatest reliance on tourism.
Second, recurring mobility restrictions are both negatively impacting consumption, particularly of services, as well as disrupting supply chains. Already mounting frictions on international logistics, due to the difficulties of deploying crew and containers in de-synchronized global vaccination and quarantine standards, are being exacerbated by Delta. This will put further upward pressures on the cost of production in coming months.
Will the world have to ‘live with COVID’ and if so what does that look like?
The debate will likely continue in the near term. Public health officials suggest a few key elements are necessary for a successful ‘live with COVID’ strategy, such as a combination of high vaccination rate, effective system of testing and tracing, and strong healthcare infrastructure.
For most economies in Asia, getting there will require more policy commitment and investment. Taiwan, Australia, New Zealand may opt to wait until vaccination rate picks up, whereas China will require a mix of higher vaccinations and policymaker willingness.
The rest of Asia, such as India and Southeast Asia (excluding Singapore) also may not meet these optimal conditions any time soon, but could nonetheless pivot earlier out of economic considerations.
Authors:
Alex Wolf, Head of Investment Strategy for Asia
Julia Wang, Global Market Strategist
Yuxuan Tang, Global Market Strategist
Weiheng Chen, Global Market Strategist
What is “Zero Covid” and why are some economies pursuing this strategy?
In recent weeks, the spread of the Delta variant has upended Asia’s re-opening plans, compounded supply chain disruptions and caused more economies to revert to greater restrictions. It has also ignited a lively debate on the costs and benefits of the stricter policies with regards to Covid. Several economies in Asia, including mainland China, Taiwan, Vietnam, Australia, New Zealand and Hong Kong aim to keep domestic cases to zero with a mix of strict quarantine and mobility restrictions – the so called “Zero Covid” strategy, and have largely have been successful in swiftly containing and eliminating local outbreaks, with varying degree of economic costs. As the world progresses through this pandemic, Asia is moving into two camps – those treating Covid as endemic and “living with the virus” and those pursuing “Zero Covid.”
In our view, the difference in each economy’s strategies is likely informed by a mix of factors, such as the state of healthcare infrastructure, economic structure, governance capabilities as well as cultural differences. For example, economies that have more specialized healthcare infrastructure (i.e. ICU beds, ventilators), can afford to have some degree of constant hospitalization, while in other economies the risks of hospitals being overwhelmed is greater. This is an important policy consideration in China given its population density, and large internal disparity. For example, in Q1 2020, the healthcare system in Wuhan, which was amongst the best in China, was quickly overwhelmed, and necessitated a near national shutdown in order to free up resources. In addition to healthcare infrastructure, economies that are manufacturing-led, rather than services-led can afford to have stricter mobility rules without jeopardizing economic growth.
Near-term impact
Although many economies continues to pursue ‘Zero Covid’, some of their strategies have evolved which have significantly reduced the economic cost. China is again a good example, where extensive testing, tracing and monitoring regime means that indiscriminate lockdowns are now a thing of the past. Instead restrictions are fairly localized (to residential blocks and buildings with outbreaks), and much more short-lived. So the economic impact of Delta is much smaller than the initial wave in 2020. Below we look at the impact of Delta on each Asian economy, using the Google mobility index. The dark blue column, labelled “latest” contains data for July and August, and is a good proxy for understanding the impact of Delta.
Is “Zero Covid” achievable with new variants and what is the end game?
The emergence of various mutations, especially the Delta variant, has complicated reopening across Asia. The Delta variant is highly transmissible - it is estimated to be about 60% more transmissible than the Alpha variant1, and its R0 (basic reproduction rate, meaning the estimated number of secondary infections that are transmitted from an infected person) is estimated to be somewhere between 6 and 7, compared to 2.5 for the original strain2.
Given the variant’s higher transmissibility and lower vaccine efficacy, the scientific community is now debating whether herd immunity is achievable. Epidemiologists suggest that assuming an R0 of 6, the herd immunity threshold (i.e. the proportion of the population who would need to be fully vaccinated, infected, or both, to interrupt transmission) would need to be greater than 85%.3 Prof. Andrew Pollard, head of the Oxford Vaccine Group, told British lawmakers that he believed herd immunity is no longer possible, as the virus can still spread to a significant number of fully vaccinated people.4 A study from the UK’s Scientific Advisory Group for Emergencies (SAGE) concluded that the eradication of Covid-19 is unlikely, as there will always be variants, and it’s likely that vaccine induced immunity to infection, and potentially severe disease, will wane over time. 5
Despite that, we note that the vaccination rate is still the most crucial indicator that’s factored in to reopening strategies. However, although economies across the region have been ramping up vaccinations, very few of them can reach the potential herd immunity threshold required by the Delta variant (i.e. 85% as suggested above) by the end of this year. This means that few economies in Asia are close to a complete exit from the pandemic. Policy choices across the region will play a key role in countries’ economic trajectory; both in terms of administering vaccines, but also how countries choose to pursue “Zero Covid” or transition to a strategy of living with the virus.
Long-term challenges of “Zero Covid” strategies
1) Persistent disruptions
The contagiousness of Delta and the apparent difficulty in preventing imported cases means new outbreaks are impossible to rule out. Countries pursuing “Zero Covid” strategies are likely to face repeated cycles of containment measures with each new cluster or wave. This could result in repeated restrictions that continue to exert a drag on consumer services in coming months, further pushing out a full recovery.
Uncertainty over future lockdowns also appears to be playing a role. More cautious behavior from both consumers and private businesses are driving higher savings and reducing business investment. For example in China, the savings rate has moved up in line with surveys showing an increase in the amount of people planning to save in the future. On the positive side, once vaccination rates increase and consumers become more confident that the end of the pandemic is in sight, there is room for continued consumer strength if/when savings rates return to their long-run average.
2) Closed borders
Strict border control is a key component of "Zero Covid" strategies. International travel could see the largest impact, and given China’s size and importance as a source of tourists, this is feeding through into regional economies dependent on tourism. Although several countries have looked to attract tourists with vaccinated traveler programs, a relaxation of travel restrictions is likely not enough to restore outbound tourism from China. Even if a vaccinated family can enter a destination, they will still have to quarantine upon their return to China. They are therefore unlikely to leave in the first place. The government’s commitment to a zero-tolerance approach (in addition to the recent outbreak being caused by imported cases from an international flight) likely ensures that these restrictions will remain in place for some time despite the accelerated pickup in vaccinations.
What are the implications if international tourism remains impacted?
First, regional economies with a larger tourism industry will face a prolonged, sluggish recovery. The loss of inbound tourism from China will most directly impact those countries that have the biggest dependence on visitors from the mainland, such as Thailand (11m Chinese tourists in 2019), Japan (8.6m), South Korea (6.0m), and Vietnam (5.8m). Relative to the size of the destination economies, Vietnam and Thailand have the highest exposure to tourists from mainland China, at more than 3% of GDP for each. So, to the extent China’s border controls remain tight, the recovery in the service sectors of these economies could be further delayed.
Second, for China the decline in outbound travel creates a small net surplus in tourism revenue. This factor may be an additional reason to not rush to remove restrictions. Since China generally runs a large services (tourism) trade deficit - the economic effect of restricting international travel has been to reallocate that portion of (mostly higher-income) household budgets to other areas, like domestic consumption and investment. As a result, China’s travel services balance improved by around $105bn from 2019 to 2020, or about 0.7% of GDP. This is one example where China’s Zero Covid strategy is not as costly as one might assume - since (in a open border scenario) the lost domestic consumption (as some Chinese residents resume vacationing internationally) would not be fully offset by the return of foreign tourists to China. (However, beyond the direct impact on tourism trade, the total economy impact becomes more nuanced. Open borders and more international exchange can have a positive impact on productivity, not to mention the potential boost to domestic consumer sentiment from a full removal of COVID-related border restrictions).
Lastly, supply chain disruptions could persist for longer. Vietnam is a good example. The government is sticking with a "Zero-Covid" strategy and the country still has among the lowest vaccination rates in Asia, meaning new cases will result in lockdowns that affect factory production. A prolonged factory disruption in Vietnam could cause supply chain disruptions in key export products, as Vietnam represents a disproportionately large source of production for smartphones and is the second-largest producer of footwear and clothing in the world. The rest of the world could see higher prices in these products as supply disruptions continue, whereas China could actually benefit from filling the supply gaps left by Vietnam.
Will economies change their strategy?
As most Asian economies remain in the throes of the pandemic and vaccination rates are still below those in developed markets, we are unlikely to see a pivot to Covid strategies in the near-term. The extent to which economies will change course would depend on the relative importance of various factors; these include vaccination rates, variant developments, economic structures, robustness of healthcare systems and cultural, social and political preferences.
First, vaccinations are fundamental to reopening. Although recent studies have shown a worrying drop-off in efficacy over time, especially against the Delta variant, effective vaccinations are still able to minimize adverse infection outcomes, which have given economies confidence to reopen without overwhelming their healthcare systems.
Economic structures can also inform policy directions. “Zero Covid” has a significant impact on the high-touch domestic services sector, but it can minimize the length of production disruptions for economies more oriented towards manufacturing and exports.
In addition, tourism-heavy economies such as Thailand are incentivized to push for a swifter border reopening, in contrast to less dependent or tourism-deficit economies such as China.
Finally, democratic societies may pressure governments to loosen mobility restrictions, especially as the rest of the world continues reopening as Covid-19 becomes less novel and more of a fact of life.
Looking across the region, Singapore appears to be the leader in shifting strategies towards “living with Covid”. Japan and South Korea look set to follow as vaccinations continue to increase. Much of Southeast Asia and India might struggle with balancing reopening and flare-ups amidst lagging vaccinations. Mainland China (and Hong Kong, effectively) are likely to continue pursuing “Zero Covid” as an established political and social framework, especially ahead of events such as the 2022 Beijing Winter Olympics and the 20th Party Congress early next year. “Zero Covid” stalwarts Australia, New Zealand, and Taiwan seem patient with their strategies amidst economic resilience, though questions about their longer-term strategies with the transmissibility of the Delta variant may encourage a gradual pivot.
What does it all mean for investors?
In the context of diverging Covid strategies, reopening progress and economic recoveries across the region, the investment implications are similarly nuanced. This leads us to be highly selective and favor active management.
- Constructive on the Singapore dollar relative to Southeast Asian currencies, especially as growth and monetary policy outlooks diverge in favor of vaccination and reopening leaders.
- Constructive on Japan as a cyclical catch-up to developed markets and a beneficiary of accelerating vaccination rates.
- Continue to focus on manufacturing leaders in Taiwan and South Korea as beneficiaries of robust global demand and structural megatrends in technology.
- Constructive on China’s onshore policy beneficiaries – EVs, renewables, manufacturers – as well as the currency on the back of sustained export strength
Footnotes:
1 American Medical Association (AMA). https://www.ama-assn.org/delivering-care/public-health/sandra-fryhofer-md-discusses-covid-19-vaccines-and-variants
2 The Lancet. https://www.thelancet.com/journals/lanres/article/PIIS2213-2600(21)00328-3/fulltext
3 Fine P, Eames K, Heymann DL. “Herd immunity”: a rough guide. https://pubmed.ncbi.nlm.nih.gov/21427399/
4 CNBC. https://www.cnbc.com/2021/08/12/herd-immunity-is-mythical-with-the-covid-delta-variant-experts-say.html
5 UK Scientific Advisory Group for Emergencies (SAGE). https://www.gov.uk/government/publications/long-term-evolution-of-sars-cov-2-26-july-2021
All market and economic data as of August 26, 2021 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
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