COVID Mutations, Bird Flu and Other Tail Risks
Bottom Line: A major mutation of COVID from the current Omicron wave in China is a tail risk, which is unlikely to impact market prices. Indeed, with the current wave having less severe consequences than feared it could bring forward the China consumer bounce to late Q1 rather than Q2/Q3. Meanwhile, the current huge avian flu wave in birds is not causing concern over transmission to humans and is also a very low tail risk. Long-term a new major human flu wave will likely arrive says scientists but this could take years.
Caution in the scientific community over the surge in COVID in China still remains (here), given that Delta COVID emerged in India in 2020 in similar circumstance of an undervaccincated population and widespread infections. However, though data from China is not accurate, most scientists note that the risk of a major new variant is low and that so far existing Omicron strains are evident (BA 5.2 and BF.7). If anything the Omicron wave in China has had less severe consequences than western scientists and ourselves had feared, with hospital systems under pressure but not close to collapse. Large scale spread to rural districts is likely in the coming weeks, with China New Year celebrations starting on January 21. If this is seen by the Chinese population as part of the normalisation process, then it could build confidence and bring the post COVID consumer wave forward from Q2/Q3 to late Q1 and offset November/December economic weakness.
Elsewhere, avian flu continues to reach new heights among birds, with a greater breadth and persistence in recent months (here). However, scientists downplay concerns of a jump to human to human transmission. Human infection has only occurred with intense interaction with infected birds, while the severity and fatality rate is lower than the first H5N1 outbreak in 1997 that killed six people. This is thus a very low tail risk.
Scientists do warn that a human flu pandemic will likely occur at some stage but from sources other than bird flu – remember that COVID is a cold pandemic. Swine flu in 2009-10 caused acute concern initially, but ending up being within the normal fluctuations seen from annual flu season. The last major flu that caused system wide healthcare problems was in 1968. For financial market a human flu pandemic is a long-term risk, rather than something for the next 12 months.