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Covid known unknowns, ESG vs. S&P, Suganomics

By Jasper Cox
18 Sep 2020

This week in Keeping Tabs: what scientists still don't know about coronavirus as we grapple with a second wave, ESG index funds outperformed in the first half of the year, and Japan's currency challenge.

Coronavirus cases are reaching frightening levels again in the UK and EU, giving us all a sense of déjà vu. But compared with the beginning of the year, scientists do know more about the disease, which should in theory make us better able to react.

Adam Kucharski, associate professor at the London School of Hygiene and Tropical Medicine shares his insights for an article on IDEAS.TED.COM authored by Karen Frances Eng.

He thinks Covid-19 "will disrupt our lives for at least the next year or two. 'The pandemic won’t end properly until there’s enough immunity — ideally from a vaccine — to stop cases and hospitalizations rising again,' he says."

As for an example of where scientists are now better informed, he says that the original call for people to stay a certain fixed distance away from others — i.e. two metres, 1.5 metres or six feet — is overly simplistic.

"We’ve seen a number of case studies that show how enormously risky indoor group gatherings can be," he says. "For example, there was a case in Germany where someone without symptoms had an all-day meeting with 13 people, and 11 became infected."

Scientists also know that younger people, especially schoolchildren, are less likely to develop symptoms.

However, plenty of uncertainties remain. It has been difficult to work out the extent to which schoolchildren contribute to outbreaks.

Meanwhile, some people appear less likely to be infected in the first place, but "we don’t yet know what’s influencing that. Could there be some pre-existing component of their immune response that’s fighting it off?" Kucharski asks.

At the other end of the scale, some apparently healthy people react particularly badly to the disease, and we don't know why.

"Recent exposure to other related coronaviruses could potentially provide some cross-protective immunity, and there are other health factors that researchers are identifying," he says.

"Based on other viruses, I think there could also be some genetic or biological factors. Some people may have genes that lead to increased risk of severe Covid disease, either directly or indirectly through another condition."

And we still do not know too much about how immunity works once someone has been infected.

"How long will that protective effect last? This duration of immunity is important for vaccine development. Will we be able to get a vaccine once that will last us years, like the measles vaccine? Or will we have to get it annually, like a flu shot?"

Back to markets now, where Lihuan Zhou, Joseph Heavner and Yili Wu at the World Resources Institute take a look at ESG fund outperformance during the crisis.

They report that nine of the 10 largest US ESG index funds outperformed the S&P 500 in the first half of the year. The ESG funds they analysed beat the Vanguard S&P 500 ETF by 2.1 percentage points on average, after fees.

Unsurprisingly, part of the outperformance of ESG came down to investing more in information technology sectors and less in the energy sector.

But the researchers found that "ESG index funds… also did better by picking good stocks within sectors, too."

Finally, let's turn to Japan, which has a new prime minister in the form of Yoshihide Suga, who takes over from Shinzo Abe.

Chris Miller, assistant professor at the Fletcher School and the Eurasia director at the Foreign Policy Research Institute, discusses Suga's next steps at Foreign Policy.

He notes that like Abe, Suga's entire career has been in politics, and for the last eight years he was Abe’s chief cabinet secretary. 

"The fact that Abe and Suga have already spent years working together provides plenty of reason to expect policy continuity between the two leaders, not least because Suga played a role in devising the policies of the Abe years," Miller says.

Suga's predecessor was known for "Abenomics": loose fiscal policy, loose monetary policy, and structural reform.  

"In practice, Abe did less fiscal easing than he promised, pursuing instead balanced budgets," writes Miller. "When it came to structural reform, Abe took some steps to open Japan to trade, but he was less revolutionary than his rhetoric suggested."

Going forwards, Miller reckons the government will carry on splashing the cash as it looks to manage the effects of the economic hit.

However, he points to a potential problem when it comes to monetary policy.

"After two decades of easy monetary policy, the Bank of Japan believes it is out of additional ammunition. Yet the US Federal Reserve is just getting started, having drastically expanded its monetary toolkit to fight the coronavirus-induced economic crash."

This points to the yen strengthening against the dollar.

"Currency policy has always been a controversial issue in Japan, where exporters wield substantial political influence," Miller writes. "The fiscal and monetary policies of Abenomics weakened the yen, benefiting Japan’s exporters. Suga may face a difficult decision if the dollar continues to weaken, the yen strengthens, and Japan’s exports become less competitive."

By Jasper Cox
18 Sep 2020