Can economies handle a second wave of Covid-19?

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Countries all over the world are easing out of lockdown in the search for a ‘new’ normal. But could we be on the brink of another Covid-19 economic hit? Newton chief investment officer Curt Custard gives his take on how investors might prepare for a second round of the virus.

The start of a new decade is oftentimes looked at as an exciting milestone, but it’s evident 2020 has not been the year many thought it would be. Covid-19 shook up the globe and negatively impacted a multitude of industries and sectors. Markets plummeted, and despite momentum returning, the question on many investors’ lips is this: could another Covid-19 hit be on the horizon?

Scientists have expressed their concern over a second wave reaching the Northern Hemisphere in the fall of this year¹, when ‘flu season’ hits.

No one can predict the future, but Custard, chief investment officer at Newton believes smart investors need to be prepared for any outcome. He contends the epidemic has accelerated a number of investment themes that involve demands on healthcare and technology while challenging others such as (what was once) China’s growing influence. “It’s created a set of ‘winners’ and ‘losers’ that are likely to persist beyond the end of the crisis,” he says.

I would expect more volatility as the market digests job and earnings data as the first round of stimulus begins to wear off. I think we’ll continue to see swings in the types of companies investors expect to do well.

In regards to asset classes, if a second wave were to happen later this year, Custard believes equities would take the hardest hit. “Equities will likely be impacted most directly as they have rallied ‘through’ this pandemic and arguably have a lot of good news baked into the price,” he says.

High Yield credit would likely be the next asset class to be affected as there remain questions about the viability of a subset of companies and industries after government stimulus begins to run out. On the other hand, I believe government bonds and investment grade credit could perform well within moderately tight bands as monetary policy is likely to act as a cap on yields rising and spreads widening,” he continues.

More lockdowns?

If a second wave were to happen, Custard believes the negative economic impact of widespread lockdowns are likely to prove too damaging for them to be implemented again in a broad fashion. It also poses a wider question: would people actually observe the rules if a second round of restrictions came into force? As seen in the UK, more people were seen disobeying lockdown rules once the weather started getting warmer. Even in early July, despite the government advising against travelling unless essential, many Brits flocked overseas to Spain, Italy and Croatia.

Instead of a second government-enforced lockdown, Custard believes there will likely be more selective disruption across countries, states, and sectors of the economy but he also believes central banks will come to the rescue if necessary. “One thing that’s likely to remain supportive is monetary policy,” he says.

For Custard, the key to likelihood of a second wave is how quickly a vaccination can be created, and whether countries’ healthcare systems have the capacity to handle an influx of patients if need be. “One concern is the ability of medical systems to absorb any increase in hospitalisations and any resulting social distancing/precautionary measures that need to take place,” says Custard.

Until there is a vaccine, companies are likely to have to navigate the impact on consumers (demand side) and suppliers in their supply chain (supply side) of various rolling lock-downs, which could both be a challenge. Clearly, the closer we are to a vaccine the more the markets will look through any surge,” he continues.

According to the BBC, 80 different medical groups are researching vaccines globally, with some already starting clinical trials². Despite how fast medical researchers are working, a successful vaccine could take years to develop. Some are hopeful a vaccine will be out by mid-2021.³

Road to recovery?

Economists and investors around the world are debating on which letter of recovery the economy will take with ‘V’, ‘U’, ‘W’ and ‘L’ being some of the top contenders, but Custard believes the focus on recovery masks some important issues.

Online and digital companies will likely continue to prosper, however small and medium-sized enterprises (SMEs) will take more time as we are likely to see an initial wave of insolvencies after the government stimulus runs out. Some sectors of the economy are likely to remain impaired for an extended period, travel and tourism, for example, while others, such as online and delivery, will prosper,” he says.

In regards to GDP, Custard’s belief is that overall GDP with developed markets will not hit pre-Covid-19 GDP levels into late 2021 or 2022 but he is interested in seeing how countries around the world prepare for a second wave. “With the right precautions, if a second wave does happen, hopefully it won’t be as sociologically and economically damaging as the first,” he concludes.

¹Www.bbc.com: ‘Coronavirus: What is a second wave and is one coming?’
²Www.globalnews.cn: ‘Chinese COVID-19 vaccine approved to enter Phase III clinical trial in Brazil’, 8 July 2020
³Www.bbc.com: ‘Coronavirus vaccine: When will we have one?’, 2 July 2020

G82352, 11 NOV 2020

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