Delta variant heralds a new dimension of risk for the markets


Last week, the World Health Organization (WHO) recorded 2.6 million new Covid-19 infections and 57,000 deaths worldwide, the lowest death figure for nearly eight months. However, an increasing number of new cases are caused by the delta variant – the virus’s most contagious mutation to date. Beyond investors’ fears of an inflationary slippage that could trigger a premature rise in interest rates, the rapid spread of the variant is now a threat for economies and financial markets to watch out for.

As of June 29, 2021, the strain B.1.617.2. or “delta” of the coronavirus, first identified in December 2020 in the state of Mah? r? shtra, India, was present in at least 96 countries, according to the Geneva-based WHO. It is believed to spread faster than the original strain and was responsible for 95% of contaminations in the United Kingdom at the end of June. This situation delayed the full reopening of the country by one month, now set for July 19. Since the beginning of June, contamination has increased more than six times among Britons aged 20 to 39, where vaccination rates are lower. In the United States, the delta variant is believed to be responsible for a fifth of new cases. Beyond the immediate resurgence of new contaminations, this development is worrying, because the more a virus is transmitted, the more likely it is to mutate with sufficiently different characteristics to create another strain.

Delays in fully reopening other economies cannot be ruled out, and many countries are taking steps to prevent the Delta Variant from gaining the upper hand. Real-time business activity, trade, production, consumption and mobility indicators show that the United States and the European Union, for example, have returned to about 90% of their levels of business. ‘before the pandemic. At 84%, the United Kingdom is slightly below (see graph 1, page 2).

The combination between more transmissible variants, a growing social mix, sub-optimal vaccination coverage and a relaxation of health and social measures will slow this progression and delay the end of the pandemic. Can we read in the last update of the WHO.

WHO has listed the four “worrying variants” of Covid-19, including the delta. The ‘alpha’ variant, which first appeared in Kent in September 2020, led to the UK’s re-containment in January this year and is now present in 172 countries. The beta, first spotted in South Africa in August 2020, is currently spreading to 120 countries. As for gamma, identified in the Brazilian city of Manaus in December 2020, it is found in more than 72 countries. The WHO, which is monitoring the situation closely, has identified other “variants of interest” called epsilon, zeta, eta, theta, iota, kappa and lambda. They are found all over the world, from the United States to Brazil, including the United Kingdom, Nigeria, the Philippines, Japan and Peru.

The UK example

However, the delta variant should be placed in perspective. The vaccines appear to be effective (see graph 2, page 3). In economies where a large portion of the population is vaccinated and where infections are increasing, such as Israel and the UK, cases are mostly mild, with low rates of hospitalizations and excess mortality. Compared to previous waves of contamination, the burden on national health systems is reduced. The United Kingdom and Israel have respectively vaccinated 66% and 65% of their population with at least one dose of Covid-19 vaccine.

Assuming a two-week delay between contaminations and hospitalizations, we can assess the curve that contaminations in the UK would have taken without the vaccines. These calculations show that the actual number of hospitalizations from coronavirus in the UK is at least four times lower, and the number of deaths 16 times lower, than they would have been in the absence of vaccines.

This is both an argument for large-scale immunization programs and a warning about what could happen in countries that do not have such a program, nor access to it. to effective vaccines. If the developed world does not help developing countries speed up their immunization programs, further mutations are inevitable.

A gap is widening between countries when it comes to access to different vaccines. The Pfizer / BioNtech messenger ribonucleic acid (“mRNA”) vaccine was 88% effective against the delta variant. Alternatives, such as China’s SinoVac and Sinopharm vaccines, which rely on inactivated viruses to trigger an immune response, are widely used in emerging countries, including China, Brazil and Indonesia. But their efficacy against the delta variant remains uncertain.

In addition, some nations, especially in Africa, do not have sufficient reserves of vaccines of any type. While governments on the continent have placed enough orders to vaccinate 60% of their population by the end of 2022, orders have still not been delivered. In Nigeria, the most populous country in Africa, only 1% of people have received a dose of the vaccine, while in South Africa the proportion is 5%.

Last June, the leaders of the Group of Seven (G7) pledged to provide “at least” 870 million doses of vaccine as part of the international COVAX initiative, and to deliver at least half of that promise by now. end of 2021. “We are racing the race of our lives,” WHO Director-General Tedros Adhanom Ghebreyesus said last month, “But this race is not fair, and most countries are just getting started. “ COVAX expects to have some 400 million doses per month in the fourth quarter of this year.

Positioned for a vaccine-supported recovery

Our portfolios remain positioned for a robust global economic recovery. In our central scenario, the vaccines will continue to be effective, because so far no variants have been shown to be resistant to them. While new lockdowns or health restrictions could slow activity, almost all economies now know how to mitigate the worst effects of Covid and have shown encouraging resilience and rebound capacity.

In this context, we continue to favor risky assets in our overall asset allocations. However, for investors wishing to set up portfolio hedges in the event of a risk scenario where a vaccine-resistant mutation emerges, option strategies can prove to be effective. The VIX, which measures the expected volatility of stocks, is at its lowest levels since the start of the pandemic, and investors can protect their returns by using put spread options on equity indices at affordable levels.

Regarding the foreign exchange market, we believe that our central scenario of a strong macroeconomic recovery will translate into an improved outlook in Europe and a moderate weakening of the US dollar. If this recovery were to stall following new measures to fight the Covid, the US currency would strengthen as investors seek refuge from risk, setting off a headwind for the euro.