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Market, Economic Implications Amid Latest Virus News

Market, Economic Implications Amid Latest Virus News

Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it. Read more on our full take.

Christine Benz: Hi, I'm Christine Benz from Morningstar.

News about the spread of the coronavirus is changing quickly and, with it, the implications for the economy and the market. Joining me to share some perspectives on these issues are Karen Andersen--she's a healthcare strategist for Morningstar--and Preston Caldwell. He's an equity analyst for Morningstar who covers the energy sector.

Karen, let's start with you. You've been keeping tabs on the spread of the virus and whether these social-distancing efforts have been working. Can you give us an update?

Karen Andersen: Yeah, sure. Thanks Christine. So yes, we're here one week after publishing our initial coronavirus analysis, four days after our town hall where we talked about the report and health and economic implications. And I have to say, I do at this point--you know, this is a crazy situation. I understand the panic, you know, as a country, as a planet, we have taken several aggressive steps to control the spread of the coronavirus just in the past few days.

And it's probably fair to say that this is uncharted territory for pretty much all of us. And Chicago is really a great example. Last Thursday, I talked about how important the social-distancing steps were. I mentioned conferences being canceled, large gatherings, the potential for working from home. But since that time, many of us who can work from home are now doing so. And Chicago has opted to close schools for March, as well as starting today--the end of day--bars and dine-in restaurant service. Countries like France, Spain, are taking similar actions as coronavirus cases in the U.S. and Europe are rising. Also, we've seen some private businesses like Apple are closing their doors. But I guess I'd say overall this is exactly what we need to do, and the fact that this is happening at a rapid pace is encouraging.

Benz: Let's talk about other mitigation efforts. You keep tabs on the healthcare sector. I think we've all been watching that space eagerly, hoping there will be some breakthroughs. Any news on that front in terms of drug development, vaccines, testing, and so forth?

Andersen: We did write a note and quick update on Friday with a little bit of information that we've got on Gilead's leading drug to treat coronavirus, called remdesivir. We are still waiting for the key phase 3 data readout that's going to be coming either later this month or in April. That hasn't changed, but the Wall Street Journal did report on the status of 14 Americans from the Diamond Princess cruise line, who were treated in Japan. These were critically ill patients with an average age around 75 who appear to be doing well two weeks after initiating this 10-day treatment regimen.

More than half of them have recovered and there have been no deaths, which--for reference, you know, the data we have that was published in the Journal of the American Medical Association, from the largest data set we have in China, shows a death rate of about 49% for those who become critically ill. So the fact that these patients are doing fairly well, who had become so sick, I think that is positive news for the potential efficacy of Gilead's drug.

Also, Sanofi and Regeneron have announced that they've kind of detailed the study that they'll be performing for their arthritis drug Kevzara, as a coronavirus treatment. So I guess I'd say overall, you know with the mitigation efforts, we're rapidly changing our behavior. We are seeing steady improvements in diagnostic testing and the number of potential treatments that are likely to benefit patients in the long run.

But you know, these efforts are just beginning and there's a little bit of a lag here. We're probably gonna see--I'd say over the next week or two--an increase in diagnosis. As we get more people tested, we're going to see a lag, and the time for people who maybe were infected, were exposed, before these social-mitigation efforts went into place. So I guess I would just prepare people over the next week or two. This is probably going to get worse before it gets better.

Benz: Okay. Preston, let's turn to you. You and Karen released a report last week where you indicated that the long-term economic impact you thought at the time would be modest. Is that still your view?

Preston Caldwell: Our view is still that in the long run, the economic impact from all of this will be modest. Given that, even with the further slide in equities that we've seen, we still think these equity markets are overreacting. We don't think they're responding to a real long-run threat. Of course, still in the short run we emphasize there could be a significant impact. And in fact, based on a tweaking of our probabilities, based on an emerging assessment of the virus, we have slightly adjusted our economic impact numbers. We thought originally there would be a 1.5% hit to 2020 GDP and now we've bumped that up to 2%. But of course, these probabilities are, you know, fluctuating almost on a daily basis, so take that with a grain of salt. But the key number is that still our long-term impact is minimal, currently at 0.3%. Given that, we don't think that the fall in equities that we've seen so far is warranted.

On the economic side there really hasn't been much in terms of new developments outside of what we've conceived. Again, as Karen mentioned, the mitigation efforts that we've seen, obviously they will have some short-term economic impact, but insofar as they help contain the virus, that's really a positive in terms of long-run economic impact. What we really want to avoid is closing factories and logistics supply chains to the greatest extent possible. So, you know, if we can keep as much of the core of the economy running, even while we have a targeted focus on closing schools, large events, etc., that's really a best-case scenario for the economy, especially in the short run.

Again, given all that our overall view remains in place, a minimal long-run impact and we think it's an overreaction that we've seen in the equity markets.

Benz: So you cover the energy sector for us. Can you briefly touch on what's been going on there in terms of oil prices and so forth?

Caldwell: So really not much has changed since Thursday when I talked and you know, the big events were or earlier in the week when, when OPEC-plus met and failed to come to a production agreement. And so again, the story there generally remains the same. OPEC-plus, which is OPEC in addition to Russia, is not going to be cutting production. And as a result of the abrogated agreement, they're going to be increasing their production substantially likely through the end of this year. That's gonna cause oil markets to go into oversupply and causes a collapse in oil prices that we've seen, and this is something we think will work itself out--perhaps sooner, perhaps later. But eventually we will have to see a rebound in oil prices because the marginal supplier of oil globally is US shale, which has a breakeven cost $55 per barrel in our view. Therefore, if we don't see a return to that oil price, then we'll see a collapse in US shale production, which will build the year after year and eventually compel, a rebalancing of global oil supply and demand.

So, very troubled in the near run and we eventually expect a return to higher prices. But the duration of the low prices is going to be long enough to really hit energy equities hard. So we've definitely continued to update our views there and we've brought many of our energy equity fair values down over the last week.

Benz: Thank you Preston and Karen for taking time to share your perspective. We'll be checking back with you regularly as new developments unfold.

Andersen: Thank you.

Caldwell: Thank you.

Benz: Thank you for watching. I'm Christine Benz for Morningstar.

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About the Authors

Karen Andersen

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Karen Andersen, CFA, is a strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. She is responsible for biotechnology research.

Before joining Morningstar in 2005, Andersen received a master’s degree in business administration from Rice University, where she served as senior healthcare analyst for the M.A. Wright Fund and earned the distinction of Jones Scholar. She has scientific research experience in both academia (at Rice University and the University of Queensland in Australia) and industry (at Lexicon Genetics and a subsidiary of Genzyme).

Andersen also holds a bachelor’s degree in biochemistry from Rice University, where she graduated magna cum laude. She is a member of Phi Beta Kappa and holds the Chartered Financial Analyst® designation. She ranked first in the biotechnology industry, and had the highest score overall, in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

Preston Caldwell

Senior U.S. Economist
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Preston Caldwell is senior U.S. economist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He leads the research team's views on U.S. macroeconomic issues, including GDP growth, inflation, interest rates, and monetary policy.

Previously, he served as a member of the energy sector team, covering oilfield services stocks and helping to craft Morningstar's long-term oil price forecasts.

Caldwell holds a bachelor's degree in economics from the University of Arkansas and earned his Master of Business Administration from Rice University.

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