Market Report - Another lockdown coming?

For many investors, this week brought us another step closer to the maw of a pandemic winter with a busy and unpredictable political timetable. The UK has now joined France and Spain in seeing surging cases of this latest coronavirus, even before the start of flu season proper. A press conference with the UK’s chief scientific advisor and ensuing statement from the UK’s prime minister has solidified the concerns that further restrictions lie ahead.

As we pointed out last week, the world is entering what has long been seen as a likely challenging period. However, we still suspect a replay of the first half response to the pandemic is much less likely than feared. There are a number of reasons for this.

First, the world is a lot better equipped and informed from a number of angles to fight the spread of the virus without resorting to full lockdown. Treatments, mask-wearing norms, healthcare, and testing capacity are just some of the factors that need to be taken into account here.

Second, that testing capacity is important. In spite of plenty of criticism, we are now certainly seeing a much clearer picture of the spread of the virus than we saw in the initial European wave back in the first half of the year. There are a number of angles to this, but the still low (though rising) hospitalisation rates versus the previous peak in the first half is part of it. Alongside that, the low rates of positive tests across the continent, including the UK, are consistent with the idea that we are now seeing a more realistic picture of how the virus is spreading (European Centre for Disease Control).

Third, we are already seeing the rate of increase in Spain and France slow from peaks earlier in the summer. This is consistent with evidence from around the world that the spread of the virus can be curbed with measures that stop short of a full lockdown.

None of this is to suggest that the period ahead is going to be easy. From studying previous spikes in cases, we can see that hospitalisations and fatalities have tended to lag infections by around two-to-three weeks, suggesting that we may see a sharp increase in the UK in the weeks ahead. For the parts of the economy that were already struggling to recover from the first half’s blow, particularly in the services part of the economy, the renewed restrictions will make life tougher yet. The Chancellor’s package of further support announced this week will alleviate some of this strain and uncertainty on such businesses and their associated employees, but certainly not all. Most credible forecasters still expect UK unemployment to rise briskly into the year end.

For investors, again we need to remember that this more challenging period has long been expected. The recent wobble across major risk assets pays testament to this. Our own in-house investor sentiment indicator also points to a glass that has for some time been seen as half empty. The same can also be said to a certain extent of US elections and the range of potential outcomes that branch out from 3 November. Options markets already point to investors expecting a sustained period of related volatility. As we’ve pointed out, we see no edge for ourselves here. For longer term investors, keep in mind that this should all be well below your eye-line. In many senses, the only thing you should be interested in are the chances of ongoing productive growth for the world economy in the medium term. The next three months is unlikely to have any bearing on that story.

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*This article is for information purposes only. It is not intended as a product offer or investment advice.