Derailed by Delta?

Just as the US and many parts of the world are nearing a return to normal, a new covid variant has emerged – the so-called “Delta” variant. How concerned should we be about Delta? What impact might Delta have on the global recovery? At least domestically in the US, the outlook is encouraging. The rest of the globe, particularly emerging markets, remains in question.

What is the Delta variant?

As expected, covid strains have mutated over time. Unvaccinated countries have been particularly problematic, where the virus’ spread remains largely unchecked – giving it ample opportunity to mutate. New covid strains that are sufficiently differentiated from other strains are typically named (using Greek alphabet) – i.e. Beta, Gamma – and now Delta.

First identified in India last December, the Delta variant is particularly concerning. Delta appears to be both more contagious and more severe that prior variants. Estimates show that the Delta variant is currently spreading 50% faster than the original (“Alpha”) variant. Even worse, early research suggests the Delta variant is about twice as likely as the Alpha variant to result in hospitalization for unvaccinated individuals. The Delta variant has rapidly swept the globe and become the dominant strain in much of the world.

Vaccine Efficacy vs Delta

Fear not, however – for the most part, vaccines are still excellent protection against the Delta variant. Even better news is that the primary vaccines being used in the US – the mRNA Pfizer and Moderna vaccines, seemingly remain highly effective. Data shows that the Pfizer vaccine is still approximately 90% effective against symptomatic infection (even better with respect to severe outcomes – i.e. hospitalization). Moderna has seen similar preliminary results. Strong protection against even symptomatic infection should help keep spread of the virus relatively low, at least in the US.

Unfortunately, other vaccines are not quite as effective. Though it still offers good protection against severe outcomes, the Astrazeneca vaccine appears to only offer about 60% effectiveness in preventing symptomatic infection (down 10% or more vs Alpha). Similarly lower levels of protection against symptomatic infection have been observed in popular Chinese vaccines. Complicating matters further globally is the fact that Astrazeneca’s vaccine is currently estimated to have the largest distribution worldwide, leaving much of the vaccinated world with suboptimal protection.

Fragmented Global Recovery

The key takeaway here is that much of the globe, particularly outside the US, is likely to face a fragmented path of recovery. Unvaccinated countries are clearly the most at risk. Indeed, with only about 20% of its population fully vaccinated, Japan is sounding the alarm and has declared a state of emergency amid a virus resurgence. This shocked the world as the summer Olympics will no longer be allowed spectators as a result. Likewise in Australia, with a vaccination rate similar to Japan, nearly 1 in 2 people are currently under new stay-at-home orders. In total, merely 10% of the global population is estimated to be fully vaccinated.

But vaccinated countries may be at heightened risk as well. The UK is a particularly interesting situation, as they have among the highest percentage of population vaccinated worldwide, yet are seeing a huge surge in new cases. Notably, the UK has predominately used their home-grown Astrazeneca vaccine. It could well be that Astrazeneca’s relatively poorer protection against symptomatic infection is allowing Delta to spread more rapidly in the UK.

Path Forward & Investment Implications

The US, however, seems uniquely well-prepared with its high levels of vaccination and dominant use of particularly effective mRNA vaccines. Nearly 50% of the entire US population is fully vaccinated. For those in the higher risk portion of the population – people over the age of 65 – the numbers look even better. In this group, 4 of every 5 people are already fully vaccinated. The US may see pockets of outbreaks in lesser vaccinated regions, but it seems unlikely that severe outcomes will tick up meaningfully, or that cases will broadly reaccelerate to concerning levels. This should bode well for a continued domestic recovery, albeit alongside a fragmented globe. The rest of the world should ultimately improve as more people are vaccinated generally, and more countries get access to Pfizer and Moderna vaccines following their US-focused initial rollout. This may take some time, however, particularly as these mRNA vaccines are relatively more difficult to transport/store.

As such, investors should remain primarily focus domestically, as an uneven recovery may continue to plague the rest of the world. Likewise, investors should exercise caution around experience and travel related names, particularly those with global exposure, as the Delta variant throws a wrench in re-opening and travel plans for much of the world.