Taiwan and South Korea were barely touched by COVID-19 compared to the U.S., their shutdowns were less severe, and the pandemic is long gone. They are still afraid though.
As we continue to speculate on how the economic recovery from the effects of the COVID-19 pandemic and the quarantine we put in place to try to contain its spread, people are starting to look at the experience in Asian countries such as Taiwan and South Korea to seek a preview of what we may expect.
Both countries have well developed economies, were involved in the early stage of this outbreak and are therefore further along, and offer a higher level of transparency than China, whose data is considered to be less reliable. What is especially notable about comparing their experiences with the United States is their offering us a look at how life will proceed once the infection is over, and even though we still do see a few cases still emerging over there, the pandemic has already run its course and we get to see what the aftermath looks like.
The outbreak was so minor over there that we may even wonder whether they have been infected with the same virus. The highest daily death toll in South Korea was 9, back on March 24, and the country of 51 million people have only seen a total of 273 deaths so far.
Taiwan did even more remarkably, with only a total of 443 cases and 7 deaths among a population of 23 million. The United States, in comparison, is up to 330 deaths per million, versus only 5 in South Korea and 0.3 in Taiwan.
Several European countries are actually leading the way in deaths per million, with Belgium leading the way with 822, followed by the U.K. with 585, Spain with 580 and Italy with 556. While the counting is virtually over in Asia, they are showing us that this doesn’t completely die and tends to linger on for quite a while after the main outbreak is over.
These continuing cases in Asia may not be significant from a statistical viewpoint, but they still have psychological weight, and we have seen this manifest by the way that South Korea, along with the rest of the world, has reacted to the ebbs and flows of some very small numbers. On May 28, for instance, the number of daily cases “leaped” from staying below 50 for two months to 78, and somehow a second wave was underway and this became big news, and of course the re-opening of their economy was blamed.
If there was going to be a big second wave in these countries though, it surely would have emerged before this, and all this showed is just how just a few cases like this can stoke our fears. It’s not even that the first wave was all that big in South Korea anyway, and was even less noteworthy in Taiwan, and even when their first wave was at its peak, neither their experience nor the ones in other Asian countries, particularly China, served to scare us all that much.
When we started to see much bigger numbers emerge in Europe, this is what changed the game and turned this into a real pandemic, but while South Korea and Taiwan’s numbers didn’t scare us, it sure scared them, and they are still scared even though the event has wound down.
The human psyche doesn’t always process information very well, and this is especially evident in the way we interpret risk. Many people are much more afraid of flying for instance then traveling in a car, even though flying is much safer. They see the odd plane crash and experience it viscerally, without looking at the statistics or even wanting to. Fear does not require deliberation and does its worst in the absence of it.
From a purely economic perspective, there are two main elements that are impacting it negatively, which are the effects of quarantining trade and the reluctance to trade among the public due to fear. While the shutdown part has an obvious effect, we cannot just assume that re-opening things will solve the problem, as we might think if we assume too much rationality, which would be a real mistake in this case.
The very fact that so many are thinking that we need a vaccine before they will be comfortable again speaks loudly to this, meaning that even if this virus goes completely out of existence, they are still going to worry and still want a vaccine. They may continue to worry that it might come back, and even though we may think that this worry would only make sense if it did actually come back, as you can’t catch something that isn’t even out there, fear and clear thinking just don’t go together, as long as we continue to be in the grips of fear.
Many of those who look upon the economic devastation that this pandemic has brought us have focused too much on the regulatory side of this and do not seem to be paying enough attention to the psychological aspect, the role of fear in other words. It’s easy to move more toward normal on the regulatory side, but the fear may linger for quite a while in many people, enough to continue to matter for a considerable period.
Economists, who mostly assume rationality in their models, will have a tendency to overweigh the role that the forced isolation has played in this, while being at risk of underweighting the voluntary isolation that people are choosing out of fear. We need to look at both in order to get a good idea of where we may be headed and how long it may take to really heal from this.
Some have gone too far the other way, thinking that this will hold us down considerably for years and we don’t want to make this mistake on the other end of things instead, putting too much weight on the fear side. The right balance and understanding will reveal itself more in time, but we do have the ability to look to Asian countries to get a preview of this, as they have been there for quite a while now.
We Need to Continue to be Wary of Stocks That Remain Vulnerable
There are certain sectors that have thrived throughout all this, sectors that have seen their demand be maintained or even increased over this time. Among those affected, those sectors that rely on close physical contact to conduct business as normal, such as travel and hospitality, have taken the worst of this and this is where the risk of continued fear will manifest itself the most.
The more prone industries are the ones that we want to be particularly aware of, but this does not mean that we want to be using this impact as any sort of proxy, where we end up overweighing them instead of looking at the big picture. As investors though, we are very much interested in sector performance, to know whether we want to be in the stocks in these sectors given their outlook as this recovery moves along.
Taiwan didn’t even shut down any of their businesses, and instead sought to control the outbreak by restricting people entering the country and limiting their quarantining to the sick, the way we usually do it. This worked amazingly well, as their numbers show, which stand in stark contrast to the ones in countries that have chosen much more aggressive approaches to isolating people.
Taiwan therefore didn’t suffer any economic damage from the lockdown because they didn’t have one, and all of the economic effects of COVID-19 are therefore attributed to the fear element in all of this, allowing us to see this in its pure state.
Retail spending, excluding groceries, was down 14% in April in Taiwan, not the much bigger impact that shutting down these retail stores involves, but still a significant loss. The restaurant business has been particularly impacted, down 23% in April year over year.
It may be that the outbreak continuing to do so much destruction in other areas of the world may be contributing to this, where people remain worried about a second outbreak. It’s not that the first outbreak amounted to anything notable, and these countries have led the way in showing us that we don’t get second waves of note when we stay open or later open up, but once again, fear does not need to make sense.
Cellphone data from May shows this trend of avoidance continuing, and the one in over three million chance of dying from this overall still carries a big stick, and when we consider that much of this reticence has been with non-elderly people whose chances of succumbing to this virus is many times less likely than this, it’s clear that we do not need any sort of actual threat to modify this behavior.
South Korea’s outbreak was considerably more serious than Taiwan’s, where 15 times more people per million have died, even though the deaths per million in the United States has grown to 65 times higher than in South Korea. The more people die, the more people become afraid, and people are showing that they are more afraid in South Korea than in Taiwan.
South Korea did impose a lockdown, even though it was of a lesser degree than the United States put into force. South Korea was very cautious in re-opening, waiting for the numbers to go down to very near zero before daring to, and they even pulled back when a few extra cases started to emerge, amounts that still portrayed the show as being well over.
The restrictions have been lifted, and we’re now able to see what the landscape looks like there as well when the waters have receded. South Korea’s retail and services sector continue to struggle overall, and in spite of the outbreak nearly disappearing and businesses opening again, this sector has not recovered at all and remains off January levels by 17%.
We did see a few attempts at recovery along the way, and they had cut this deficit in half several times, and as recently as May 11, but each time, the enthusiasm has been beaten back in a way that there is no other explanation for this than the ebbs and flows of the level of fear in the country, and this number sitting at its lowest tells us that there is plenty left.
Travel has been particularly hurt in South Korea, with travel-related businesses only operating at half the level that they were at back in January. Travel may be the leading indicator of the level of fear overall, and it is only when this returns to normal that we can say that the fear has really subsided.
The South Koreans didn’t need much of a quarantine or even travel restrictions as their people have managed this all on their own, and continue to. When we look at our own economic numbers, we need to be well aware that a good portion of the contraction is the sort that would have been self-imposed to a meaningful degree.
As the mandatory restrictions become more and more lifted, as we lift this tarp from the ground, we might expect the ground to look pretty normal, but we may instead reveal a lot of moss that can choke off the ground pretty well all by itself.
The Stores Can Be Opened Quickly, But Minds Opening Takes Longer
We’re learning more and more how persistent the fears of a COVID-19 may end up being, and Taiwan and South Korea don’t have a tarp but are still covered with moss. When we consider that there was so much less danger there than in the U.S., like with the virus, the fear that remains when this ends in the United States may be even more impactful.
We also need to add in the fact that job losses in the United States were twice as severe as in these Asian countries, and especially that the higher level of economic suppression in the U.S. will end up with a lot higher percentage of these jobs not coming back when we fully re-open, because they will not have survived the pandemic.
These effects are cumulative, so we need to add the contraction that fear is causing with the natural contraction that the job losses will result in. We will learn more about what the total damage will be soon, but the experiences of South Korea and Taiwan suggest that things won’t bounce back anywhere near as well as some may believe.
This should have us being even more selective with what we invest in than if this were more of a temporary thing, and especially be careful with sectors that are still very much exposed to contraction after the lockdown is fully over.
This doesn’t mean that we should just ignore these exposed stocks, as there may be some nice opportunities with them if the time is right, but the timing of this does need to depend on waiting until the market is ready, and only stick around while their momentum remains positive.
The new normal for stocks is to be more wary of them, and to be more particular with what we do buy and hold and pay particular attention to their earning their keep or serving to harm us by bringing our overall results down.
This is not a bad thing at all though, as it affords us even more opportunity as more investors move from the weak to the strong, which makes the weak even weaker and the strong even stronger. This does make it even more important to choose well though.