Are we entering a period of increased uncertainty?

Scenarios to help you think about that.

Last year I published a number of scenarios in March on what COVID might look like for the next 12-18 months. I also presented to the National Australia Bank Mortgage Broker Network in May with updated versions. You can watch an excerpt or the full thing HERE. I think that the scenarios have held up pretty well although my likelihoods were out of whack because I placed too much confidence in our capacity to respond competently and reasonably. Australia has done that but I have been shocked by the problems and incompetence in places like the USA and the United Kingdom.

There was a great deal of uncertainty in March to May last year and it is my view that we are entering another period of increasing uncertainty. Not despite the vaccine rollouts but because of the vaccine rollouts.

The scenarios below apply more to Australia than anywhere else but if you contextualise the thinking to your local area I think they can be helpful.

The two key sources of uncertainty are:

  • Social complacency in the face of vaccine rollouts which I have written about in more detail HERE.

AND

  • Reduced vaccine effectiveness in the face of the new variants that have emerged.

These two can also interact with each other, either by people being less likely to be vaccinated in the face of vaccine uncertainty, or poorer effectiveness meaning that complacency has a greater effect.

Here in Australia the vaccine program is current designed to start rolling out this month with the more vulnerable populations (health professionals, aged care residents, aged care workers, etc) going first and being given the Pfizer vaccine. If you are in Australia this is a good guide for knowing when you might receive the vaccine. The second stage then moves to the next group of vulnerable people (over 70, Indigenous Australians over 55, etc). The third stage primarily rolls out to the next age group (which is where I will get vaccinated). At the moment the bulk of the general population (including me) are scheduled to get the AstraZeneca vaccine rather than the Pfizer vaccine as long as it is approved.

Worrying signs are now emerging about the effectiveness of the AstraZeneca Vaccine to the new South African COVID virus variant. This is well explained in this Nine News Piece. For a more technical summary of this issue this series of tweets is worth looking at (but it is very technical). One of the other concerns is that some people have been saying the trial is only showing reductions in effectiveness in mild and moderate disease. But Oxford University has stated:

"Protection against moderate-severe disease, hospitalisation or death could not be assessed in this study as the target population were at such low risk,"

This means we just do not know the answer to the question on vaccine effectiveness on more severe disease but it is a reasonable assumption that effectiveness COULD be reduced given it is reduced in less severe cases. Of course there are a lot of other vaccines so we need to assess the overall effectiveness. The AstraZeneca vaccine is of particular interest to Australians because it is the vaccine that is most likely to be rolled out to the bulk of the population and we have local manufacturing capacity.

On the positive side the makers of the Pfizer vaccine are saying they can re-engineer the vaccine in 6 weeks in response to new strains if it is proven that changes are required. On the negative side the production facilities for that vaccine are still limited and it is unclear whether a further two vaccinations would be required with a changed vaccine. There is also an open question on whether new trials would be required and if so how long they would take. Safety might not be an issue in such trials but efficacy may. That all takes time. We are better equipped than any time in history to have fast technical responses but with biological systems things still take time.

So all of this leads us to multiple scenarios including:

  • The Pfizer vaccine and the AstraZeneca vaccine both work for new variants.

  • The Pfizer vaccine works but the AstraZeneca vaccine is proven to be much less effective against new strains.

  • Neither of them work well against new variants.

  • The Pfizer vaccine works well against all variants but the Australia TGA (Therapeutics Goods Administration) approves the AstraZeneca vaccine but places a caveat that it is of limited value with one or more of the new variants. Or that they do not have enough information.

  • The AstraZeneca vaccine does not get approved. You can see the vaccine details and approval process in Australia for all the vaccines HERE.

  • We move into a revolving door of vaccinations and boosters as new variants emerge.

In the face of increasing uncertainty we should all be more cautious than we were planning to be. As the new variants are dominating the new cases that are being found overseas and virtually all the risk of infection in Australia is from overseas sources this means the government is likely to be more cautious on inbound travel.

The best guide to future behaviour is past behaviour. Hard quarantine barriers, the implementation of state barriers, and the use of hard lockdown have worked very successfully in Australia. So they are likely to be our main tools until uncertainty is reduced. The fact that we have had very little transmission in the last few weeks from cases that have escaped quarantine in Western Australia, Queensland and Victoria should not fool us into relaxing our attitudes. We have just been very lucky we have not had a “super spreader event”.

My view is that all of this is likely to have a dampening effect on the economy compared to what we were expecting.

It is likely that hard international quarantine barriers will remain in place longer than previously envisaged because stopping the new variants getting in is critical until we have better knowledge. It is likely that uncertainty about capacity to travel within Australia will remain higher than we thought as people worry about state barriers being put in place. It is likely that we will experience lockdowns in major cities still. The best defense against vaccine uncertainty is not getting infected in the first place. The best defense for Australians for this is the hard international quarantine barriers. If that works well then the issues of state barriers and lockdowns is reduced in likelihood, increasing confidence in the general economy.

I hope that I am wrong but if I am right it is going to increase the level of impacts on international tourism, the university sector, and accessing rural workers in particular; as well as dashing people’s plans to travel outside of Australia.

This is not just an academic exercise for me for four reasons.

Firstly I will have to understand my vaccine options when presented to me and the impact that has on my work and travel.

Secondly I have parents in their eighties who both have underlying medical issues and they turn to me for advice because of my veterinary and research experience in this area.

Thirdly my work has significant components of travel for clients and for conferences and conferences are partly a way to make a living as a paid speaker, and partly as exposing me to other potential clients. This has been quiet for nearly a year although virtual work has replaced parts of it. I have not been on a plane in 11 months. Demand for work has hotted up in the last couple of months, partially due to the confidence that people feel about the vaccine program. Just today I was discussing a potential 15 event national roadshow with a client. One the weekend I did my first client offsite 3 day workshop for 11 months. I have a vested interest in confidence being high and borders being open.

Lastly it affects how I feel about my investment strategy and I wanted to illustrate the nature of uncertainty on how I think and act in that area. Before I do that, I want to clearly state that this is not financial investment advice and you should seek proper professional advice on your own investments. To that end I have also been deliberately a little vague about the details. My personal investment strategy in the last 2 years has had four stages:

  1. In 2019 I was concerned that the levels of risk in the global system had risen too far and that the share market in particular was susceptible to external shocks. I did not by any means predict the pandemic but at the end of 2019 my level of listed stocks was about 50% of my portfolio, with most of the rest in cash despite low interest rates. This had hurt my returns over the previous 12 months as share markets rose but I was convinced that it was the right strategy. The ideal strategy would have been to hold more shares in 2019 and divest in January 2020 but we are all prophets in retrospect and trying to pick tops and bottoms of markets is a fool’s way of investing ( see below though).

  2. While there was some information around about the COVID virus and before the share market crash in late February I divested some more shares. In retrospect I should have done more of that but I was assuming that the COVID problem would go the same way as the SARS outbreak and several others. Bad futurist. However it did leave me with a significant percentage of cash to look at investing if things changed.

  3. I normally leave investment decisions to other people and invest in Index funds and specific Exchange Traded Funds (ETFs) to allow a broad spread of risk. Occasionally I change that policy when I believe I have spotted something which can be quantified. Once the market had bottomed out and stayed pretty flat until May I changed the policy because I believed that the market had reacted too far and I started buying shares again. I believed that the market had factored in all the uncertainty and more. I was also seeing promising signs in the vaccine stories. At various times from May to the end of August I bought more and more shares and ended up with only about 8% in cash left for some flexibility. I also made some pretty big bets on three specific companies for very specific reasons (and I will not name those as I am not giving financial advice here). I made no purchases from the end of August until January 2021. I am not a trader and I had set my strategy and wanted to ride it out. This has turned out better than I expected. My targets were about above average returns over a three year period. The share portfolio has ended up rising more than of 30% from July 1st 2020 until the end of last week. This has surprised me.

  4. This week I have started unwinding some of the positions due to the rising levels of uncertainty I have written about above. Not radically so but I have shifted some funds from the big bet investments I made into a wider range of ETFs, and I have gathered a bit more cash. Time will if the strategy reaps benefits but either way I think it is appropriate for the current level of uncertainty.

In summary the strategy has been to reduce risk levels in my investment strategy if uncertainty is increasing, and to take more risks if uncertainty has fallen or has been factored or over factored by the general market. I am fond of the quote

In the Short-Run, the Market Is a Voting Machine, But in the Long-Run, the Market Is a Weighing Machine

Which is attributed to more than one person.

I have not detailed my investment strategy to try and look good ( and clearly as a futurist with a veterinary background I could have done much better) but to illustrate the point that the issues of uncertainty we face are not academic issues. At any stage my strategy could have looked bad. Without the pandemic occurring my returns for 2019 and 2020 would have been well below the market. I would have still held the view that I took the right decisions for the right reasons. I was managing longer term risk and uncertainty, not medium term returns. Investment strategies are generally judged on returns but risk is a very important part of assessing if the strategy was right. An investment strategy with a 100% return over a single year but with only a 1 in 50 year chance of success is a poor strategy, but the year it works the individual that did it would be hailed as a genius. This is not what this is about.

Again I emphasise that I am not giving investment advice and you should seek professional advice for your own investment strategies. I am recommending that thinking in scenarios is very useful.

I also want to put on the record that I am speaking from a very privileged position. Both from being in Australia where the pandemic has been handled extremely well; and from being in a position to benefit from the recovery in the share market. Many people have suffered greatly over the last 15 months and continue to do so. I will continue to try and make a contribution to the community recovering and thriving as my parents taught me that anyone who benefits from opportunity in a society has an obligation to contribute back to others.

If you want to talk to me about the scenarios please contact me by clicking on the button below:

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For those who are wondering besides my futurist qualifications and experience I do have some expertise in disease issues but from a veterinary perspective. I have participated in responses to large scale disease outbreaks in Australian farms and I was also an inaugural director of Animal Health Australia which was charged with exotic disease preparedness responsibilities. I also completed research degree in diagnostic serological testing (albeit a long time ago when the technologies were a bit different although they are still used today.)