Paid to Be Paranoid: What's the Beta of Delta?

With contributions from the Man FRM Investment Risk team.

From India to Indonesia to the US, countries are experiencing their largest Covid-19 outbreaks yet. In both Indonesia and the United Kingdom, confirmed cases hit 50,000 per day in mid-July. In India, the second wave saw a peak of 391,000 recorded cases a day in early May. The number of Covid patients in Florida hospitals has risen to a new high, breaking records set during previous waves before vaccines were available.

Source: Center for Systems Science and Engineering (CSSE) at Johns Hopkins University via Our World in Data; as of 12 August 2021.

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These recent surges have been driven by the Delta variant. In a short space of time, the Delta strain of the Covid-19 virus has spread rapidly to become the dominant variant in the majority of countries around the world. Of the countries highlighted in Figure 2, only Brazil has another strain making up the most of its reported cases.

Source: Covariants.org and GISAID via Our World in Data; as at 4 August 2021.

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The key concern of the Delta variant is that it is both more contagious – potentially causing twice as many infections as previous strains – and also that it may cause a more severe reaction than other strains in unvaccinated people. Indeed, in a few US states, the unvaccinated are entering intensive care at rates matching the winter wave.

But is the caution over the spread of the Delta variant being reflected in stock market indices? Figure 3 shows how after an initial selloff in July, most stock indices appear to have shrugged off the concerns about the rising Delta cases.

Source: Bloomberg; as of 12 August 2021 • Data rebalanced as of 31 December 2020.

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Delta’s Market Beta

It’s clear that when case numbers reach atypical highs and are localised in countries like the US, then the market beta to Covid-19 cases can turn sharply negative (Figure 4). However, this is not to say that this is a hard and fast rule. There are also periods where Covid-19 cases were rising and stocks continued to rally – i.e. positive beta.

Source: Bloomberg; as of 2 August 2021.

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As such, as the Delta variant – or indeed, new variant strains – make new headlines, investors are right to be worried about the market turmoil this could potentially create. While it’s likely that we wouldn’t see nearly as severe or broad-based equity market selloffs if we start to see lockdowns again – given what we know from the survivorship over the past 18 months – the beta of stocks to Covid-19 cases should be easier to identify.