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Lessons from Japan

by Richard Stutley, CFA

The summer solstice, or ‘longest day of the year’, took place in the northern hemisphere just over two weeks ago, putting those of us that live here on a path of gradually shortening days towards winter. It’s not all bad news: July and August are typically the warmest months in the UK, but after that temperatures will also steadily decline. It remains to be seen whether, like other airborne viruses, COVID-19 is more infectious in winter, leading to a fresh spike in cases, but in any event we think the world is significantly better prepared for new waves and hence the impact should be smaller. Therefore, while acknowledging this risk to markets, it has not persuaded us to de-risk the portfolios further.

Coronaviruses are part of the family of viruses that includes the common cold. Colds and flu occur more regularly in the winter as a result of people spending more time indoors in close proximity to one another. Viruses carried in small droplets in the air, like COVID-19, also spread further in cold air with low humidity. Hence there is a chance that infection rates will rise again in the winter months.

Economies cannot cope with multiple rounds of shutdowns on the scale of the first quarter, but one country in particular gives hope that these measures may not be the only way to combat the virus. Despite its high population density and older population, and despite the fact that it imposed a much less stringent shutdown compared to other countries, Japan has experienced a remarkably low mortality rate thus far. Less than 1 in 100,000 Japanese citizens have died from COVID-19, almost 50 times lower than in the United States (1).

The reasons for this outcome continue to be debated. While there is limited evidence of higher immunity among Japanese citizens, one thing that is clear is that they are more familiar with the policies adopted to combat the spread of the virus. Japanese citizens started wearing face masks during the 1919 flu pandemic and the practice has never really stopped; it is generally accepted that people suffering from colds and coughs should wear one. Japan also established a track and trace system as far back as the 1950s following a tuberculosis outbreak, that has been used to good effect during this latest public health crisis. These policies have been embraced by other countries and while the better average health of Japan’s citizens (Japan has lower incidence of heart disease and obesity) is something the rest of the world is unlikely to be able to replicate any time soon, they should contribute to better outcomes in any seasonal reoccurrence of the virus.

Seasonal reoccurrence of the virus is one of a number of key ‘known unknowns’ that we have spent time discussing as a team. We expect the policy response from now on to vary between regions and municipalities, rather than being set at the national level. Further, given how discriminatory the virus is by age, we expect to see a continued shift towards insulating the most vulnerable members of society while keeping those at lower risk as economically active as possible. Together these policies should reduce the economic impact of further waves of the virus. The better preparedness of the world is one of the reasons we remain broadly constructive on the outlook for the global economy and markets, notwithstanding pockets of the global equity market where valuations have come back too far and too fast. We remain invested in growth assets including equities and credit, while at the same time seeking to build resilience in our portfolios through multiple uncorrelated investments, including inflation linked bonds, real assets, gold and derivatives.

(1) Wingfield-Hayes, R. (4 July 2020). BBC News, Tokyo. Coronavirus: Japan's mysteriously low virus death rate.

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