Morgan Stanley
  • Thoughts on the Market Podcast
  • Jul 30, 2021

Digging Deeper into Delta: Part 2

With Andrew Sheets and Matthew Harrison


Andrew Sheets: Welcome to Thoughts io the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley Research.

Matthew Harrison: And I'm Matthew Harrison, Equity Research Analyst covering Biotechnology.

Andrew Sheets: And today on part 2 of this podcast, we'll be continuing our discussion on the Delta variant and the outlook for markets and the economy. It's Friday, July 30th, at 4:00 p.m. in London.

Matthew Harrison: And it's 11:00 a.m. in New York

Andrew Sheets: So, Matt, in your conversations with biopharma companies, what's your expectation on booster shots and maybe just if you could just walk listeners through that process where, you know, a new variant comes along, how does that get into the field? How does that get approved in order to get those shots into arms?

Matthew Harrison: So I guess the first thing is what's going on with boosters? There is not a consensus on boosters yet. The evidence is starting to suggest that, especially in older adults, that their prevention of symptomatic disease is going down quicker than other groups. But you've heard from both the US regulatory authorities as well as the U.S. health authorities that they're still waiting for evidence to try and figure out what the right path is. The companies obviously want to be prepared for any eventuality and so have looked at data in a variety of patient subgroups and a variety of patients that basically demonstrate that if you get a third dose, the level of protection from the vaccine is actually significantly higher than it was after the second dose. And what I mean by that is the level protection as measured by neutralizing antibodies. And so I think we know that if there are subgroups of people that are at high risk, booster's may be appropriate for them. You've seen some countries start to deploy this, Israel being the best example where they're giving a third dose to people that are immune compromised or at high risk. But it sounds like from a regulatory standpoint, it's probably going to take a few more months in the US for that picture to be sorted out. The companies have suggested that they would be in a position in the fall to file with regulators for booster shots.

Andrew Sheets: What difference would it make on a practical basis, do you think, for these vaccines to receive full FDA approval? What's this process like and what is the current thinking on a timeline?

Matthew Harrison: I think from a practical basis, there is not a significant difference between an EUA and a full approval. I think full approval does allow certain groups to maybe mandate vaccines where they couldn't, when it's an emergency authorization. And so that may have an effect on forcing or getting certain groups to take the vaccine where there might be high vaccine hesitancy. And so that may help sort of broadly speaking, but outside of that, I don't think there are many practical differences.

Matthew Harrison: In terms of the process, the FDA for a standard review process, has a lot of review pieces that it, let's call it, double checks, what the company gives them. So it may go and it will visit the manufacturing plant and it will give site inspections. It may go visit many of the clinical trial sites and audit the records at those sites. And while my understanding is some of those things have been spot done in terms of an emergency use authorization, they haven't been done to the same degree that they might typically be done. And so you should basically be thinking about it as crossing all the T's and dotting all the I's.

Andrew Sheets: I wanted to ask you about your outlook for the rest of the year. Many companies are now asking employees to return to work, school's starting soon. How do you view the path of the virus through the fall and the winter?

Matthew Harrison: So for Delta in the US, I'm watching hospitalization data and it appears from that data we are about a month behind what's happening in the U.K. So that would put us at a peak in the US sometime in the late August, early September timeframe. My expectation, though, is that the coronavirus is a seasonal virus, and because I believe it's endemic, we are likely to see cases rise again in the mid to late winter. So that's similar to what we saw last year, that sort of late December, early January time frame, through those few months. It will obviously depend on how much progress we've made on vaccinations through that period, but I would expect to see a wave of new infections at that point.

Matthew Harrison: I think schools should be able to function appropriately. Vaccinations for pediatrics hopefully should be available sometime in the fourth quarter of this year. And so I don't really see an issue for schools, but I think schools are going to function sort of in the same way that they had previously, because there's going to be a clear mix of, potentially vaccinated teachers and a lot of unvaccinated children because they just didn't have access yet. So I think there will be mask wearing and some social distancing in schools, but they should be able to function normally.

Matthew Harrison: And I think for the workplace, assuming you have a high proportion of vaccinated people, I don't think the risk is significant. But, there will be probably some outbreaks that will occur. And, we'll just have to sort of treat them in the same way that they've previously been treated.

Andrew Sheets: And finally, Matt, what's the biggest question you're getting from investors that I haven't had a chance to ask you today?

Matthew Harrison: It's mainly people are trying to figure out how impactful Delta is going to be if we should expect to see any additional lockdowns at any point. And then really the risk that you see other variants. I don't expect to see new lockdowns going forward. I think, potential outbreaks will be treated on a case by case targeted basis. And I think, both citizens as well as governments are going to sort of treat this as an endemic virus that we have to learn how to deal with and deploy sort of the medical field as best we can to help people that do get infected.

Matthew Harrison: Andrew and I think maybe one important question for you is just, how do you think the market has reacted to Delta and how has that impacted your outlook through the rest of the year?

Andrew Sheets: You know, markets are kind of pattern recognition machines. And what you've had is a number of things that have all kind of helped feed off each other to, I think, make investors appear a lot more concerned about the growth outlook. And, Delta has been part of that. Some stalling of progress on the infrastructure package in the U.S. has been part of that narrative. And just the fact that, Treasury yields had risen a lot. Cyclical stocks had been doing really well through March and April. You know, that kind of set themselves up for some normalization of that pattern, and that together with a rise in Delta cases, together with a lack of fiscal progress, I think has made people a lot more worried about growth.

Andrew Sheets: But ultimately, I think that this is a growth scare. As you mentioned, a potential peak in cases in late August, early September, is pretty important. You know, the fact that on the other elements of growth, Ellen Zentner, our Chief U.S. Economist, is calling for a quite healthy jobs number next week in the next payroll number. My colleague Michael Zezas is pretty optimistic that infrastructure will see progress. So, you know, Delta has been part of this growth slowdown narrative. But ultimately, I think that, we'll get through this. The growth optimism will rise. And this is a reason why we do think that Treasury yields are going to move higher from here. And we think this is a good time to be short bonds.

Andrew Sheets: As always, Matt, thanks for taking the time to talk.

Matthew Harrison: Great speaking with you, Andrew.

Andrew Sheets: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show. 

On this episode we continue our close look at the COVID-19 Delta variant including boosters, the outlook for fall/winter and the impact on markets.

You can listen to part one of this episode here.

Each week, Chief Cross-Asset Strategist Andrew Sheets, or a member of his team, offers perspective on the forces shaping the markets as well as insights on investment opportunities and risk across global asset classes.

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