Omicron and the lessons of pandemics past

As the world ends a second year since the identification of COVID-19, it is fitting that we look again at examples of previous pandemics to illuminate the path ahead – especially given the emerging threat posted by the Omicron variant.

There are two obvious outbreaks with several similarities with recent experience for us to consider: the Russian flu of 1889-1891 and the Spanish flu of 1918.

The evidence from these pandemics suggests we cannot conclude that viruses get milder as they mutate – although they might – but that immunity is the driver of a fall in fear and uncertainty.

Achieving ‘herd immunity’ is still the goal; vaccines help to prompt an immune response and remain the key to reaching this goal with minimal casualties. Mutations are more likely to attempt to circumvent the vaccine-induced defence, rather than to increase mortality. This is not to say that Omicron presents no threat, but that the combination of vaccines and antivirals should still offer a significant level of protection, in our view.

The COVID endgame

A few points to note from the two prior examples:

• There were no vaccines, so there was no ‘vaccine escape’. Still, mutations were likely prevalent in these episodes too, and it was the building of immunity which led the world out of both instances. Indeed, vaccines themselves are not the defence system – they merely replicate a virus to stimulate the immune system in a non-lethal fashion.
• Mutations are inevitable. Descendants of both outbreaks remain with us today, so it seems highly probable that COVID-19 will stay with us too. This being the case is as strong an argument against ‘zero COVID’ strategies as there can be.
• Distancing measures help. Evidence from 1918 – when some US cities took measures to prevent the spread and others did not – helps prove that distancing slows the progress of a disease. Social-distancing measures are of much greater benefit now vaccines can impact the outcome, and the time afforded can be used to increase the vaccination rate.

Taken together, we believe this evidence indicates that the level of immunity afforded should help ensure subsequent cases are milder and a base immunity remains. As a result, there’s reason to hope we’re entering the endgame, rather than a new and more severe fourth or fifth wave, especially with the emergence of antiviral pills to complement the vaccines.

Vaccine saturation

We believe the best path available to governments at present is to continue on the current track: accelerate the vaccination process as much as possible and press on with boosters. When they hit saturation point in the vaccination process, there are four potential paths forward:

• Open up and let the virus spread
• Encourage further vaccine uptake by limiting the movements of the unvaccinated (as seen in large parts of Europe)
• Mandate vaccination (as seen in Austria)
• Spread fear in the hope that it will increase uptake of vaccinations – helped by an increase in case numbers

All methods have the same goal: reaching herd immunity as quickly as possible.

Sadly it seems inevitable that cases, hospitalisations and deaths from the virus will pick up from here given what we know about the Omicron variant. But the key judgement for us is whether that will prompt a sufficiently big change in government restrictions or consumer behaviour to derail the global recovery. Our reading of past pandemics has helped inform our view that it will not.

Partly driven by that call, we have been selectively adding risk across portfolios in recent days - either via reducing hedges, adding equity exposure or selling safe-haven government bonds.

Epidemiologists tell us that it is simply too early to tell how serious the coming Omicron wave will be. Investors, as a rule, are not infectious disease experts. However, we have to make calls based on incomplete information if we hope to stay ahead of the market’s collective judgement.