COVID-19 Update: Tail risk - that vaccines are ineffective against new mutations

Overall - current thinking

The situation in Europe continues to be serious. UK and Ireland have seen a decline in new infections but pressure on hospitals is severe. Spain has seen a sharp worsening as the government drags its feet on restrictions. Countries with tough measures are seeing improvement, such as Germany and the Nordic countries. A combination of restrictions and fewer social gatherings is contributing to the decline in new cases. Nevertheless, Germany and others have extended lockdown into February. In the US, the situation has improved but the level of cases is still high. China has seen a small outbreak threatening travel around the Chinese New Year holiday in three weeks time.

In our view, contagion in the US and Europe should come down further in the coming weeks due to lockdowns and fewer social gatherings. However, some countries are still on a rising path, not least Spain and countries in Africa and South America. We expect restrictions to be with us for most of Q1 due to the new, more contagious variant and winter weather.

The vaccination process has been speeding up slightly but needs to speed up even more. Israel is still in the lead with the UK leading the vaccination race in Europe. Denmark is the most efficient country in the EU but lacks doses. Our base case (which is also the consensus story) remains a long winter with many restrictions but that restrictions will not be re-imposed in the autumn. A major tail risk has emerged with scientists analysing how effective the vaccines are against new mutations, especially the South African mutation. The risk is that the vaccines are ineffective and that vaccinating against the old variants will not be enough to end the pandemic this year. This would mean another 'lost' year, as the strong economic comeback would be postponed into 2022 and may imply a significant setback in risk sentiment with investors pricing in a very positive outlook at the moment.

Details

Coronavirus, treatment and vaccine news

With the vaccination process moving forward (and speeding up slightly), we think one key theme/risk is going to be whether the vaccines are also effective against new mutations (and new mutations yet to come). As it is now expected by everyone that the vaccination process will have come such a long way in summer/early autumn that things will normalise and we will see a strong economic recovery, it is a good idea to look out for risks to the consensus story. We have got used to vaccine news continuously surprising to the upside( with respect to effectiveness, completion of trials, increased production capacity etc. with perhaps the exception of the slow start to the vaccination process) so this may potentially be something, which could hit risk sentiment again.

We would like to highlight two significant scientific papers released this week whose conclusions, in our view, seem worrisome - although it is too early yet to make firm conclusions.