Here we go again – or maybe not?
There seems to be a growing amount of talk that the UK will enter a further lockdown and with this has come a multitude of warnings about the effect on the economy. The immediate reaction of some is to suggest further sharp falls in markets and a move to cash. However, we do not recommend that course of action for several reasons.
Slower growth rather than a further fall in the economy
Even with a new lockdown, we expect that the main impact will be a slower recovery rather than a further fall in economic activity. Whilst some areas will see a contraction (pubs and restaurants), others have either not restarted (conferences and exhibitions) or have started at such low levels (sports) that the effect will be minimal.
Has your attitude to COVID-19 changed?
When COVID-19 first emerged, we all needed to decide what our attitudes were, both as individuals and businesses. At one extreme, you had people who self-isolated and closed their business, whilst others continued much as they had prior to COVID-19, with little or no fear. As restrictions were implemented, people and businesses developed new behavior patterns which matched their attitudes, and this was a considerable cause in the initial fall in economic activity.
New restrictions will limit people, but they are unlikely to change their attitude and behavior and will not have the same impact.
Better detection, better treatment
When the virus first hit, we had a limited understanding of COVID-19, but over the last 6 months we have developed much better systems to detect and treat it. Whilst there are many critics of the testing system, it is still performing many more tests and this is helping in the management of the virus. There is also clear evidence that the mortality rates in Europe for those who are hospitalised has dropped significantly. This is across all age groups and shows the progress made in the treatment of the virus.
Government support
The approach of the Government and Central Banks has changed, from the initial unfocused and wide spread action to provide confidence, to the current more targeted support for certain sectors and areas.
Spain
Spain had one of the strictest lockdowns in the first wave and is currently facing a second wave. However, the lockdowns in the second wave have a greater emphasis on ensuring the economic damage is limited. In the localised lockdowns, schools remain open, restaurants and bars operate at lower capacity and people are encouraged to go to work. The result is that life continues and the level of additional economic damage is reduced.
What will happen to markets?
We feel that the economy will not suffer as much as some are predicting, for the reasons mentioned above. However, we have to expect that there could be a further fall in markets to reflect concerns about lockdowns and their effects on the economy. The falls, in our view, will be short term as there are several factors that could easily boost markets.
Not as bad as expected
Markets like to overreact, both on the upside when prices rise too fast and too far to be justified, and on the downside when doom and gloom results in sharps falls. In the current environment, we face the latter issue, especially in the UK, where concerns about COVID-19 and Brexit have made many people wary.
Vaccine
There are over 30 vaccines in development and already some countries, for example China, Russia and UAE, have started to roll-out vaccination programs. In Europe and the USA, we will have to wait for more detailed studies to confirm the safety and effectiveness of any vaccine, but as soon as one is cleared this will have a positive effect on markets and economies.
Brexit
Over 4 years since the referendum, and still this dominates the UK markets. Even without COVID-19, Brexit alone has caused volatility and uncertainty for UK markets. However we are coming close to the end and whether the result is a Trade Deal or a No Deal Exit, markets will enjoy the removal of the uncertainty.
US Elections
In just over 4 weeks, the US will potentially have a new president. Markets may be keen for a further pro-business Trump presidency, but equally they are starting to warm to a Biden presidency, which would be more stable and predictable. The one thing they do not want is a close election and an element of uncertainty, but this is a potential threat, especially if Trump decides to fight the election result in court. After November 3rd, markets will have a clearer idea and should the current polls be correct, Biden should have a strong mandate.
Summary
Like you, we all wish that the uncertainty of COVID-19 was eliminated. We welcome a return to the time when Brexit was the main issue and markets were more concerned about interest rate rises to slow a strong economy.
2021 will be year of record economic growth and recovery, and with that, we hope, a return to normality. Issues such as the Government budget deficit and unemployment will become the new issues, but we firmly believe that the UK will perform strongly without the overhanging threat of Brexit. However, getting there will be a rocky road and we would like to emphasise to all that we are here to help and discuss your concerns, so please contact us if you need to talk in more detail about markets or your personal financial circumstances.