The weekend brought long-awaited news that the UK is re-entering a lockdown for a month.
The move reflects the very real problem that the virus has resurged this Autumn at great speed. This is occurring across continental Europe and into the United States (including quite sharply in a number of electoral swing states). The wave is now significant enough that it poses a major risk to the healthcare capacity in Europe.
It is important to keep in mind that since the Summer markets have been volatile but largely flat because an assumption has existed that despite the on-going problems with Covid-19 it will be possible to sustain some form of economic recovery.
This essential view has so far been borne out by the economic data that has come through. The question is whether the renewed lockdowns we have seen in Europe in recent weeks challenge that assessment.
We believe it is too early to conclude this. Whilst there is no doubt that in the UK November will once again become a month of contraction there is a good case that growth will re-bound in December as we move towards Christmas with some pent-up demand.
It is also of course important to note that this bad news for the virus is happening at almost the exact time that we can expect the first set of results from Phase III vaccine trials.
As we have said, before the third of fourth week of November should be our base case for the first round of Phase III results. Good results here would undoubtedly be a major positive for stockmarkets. This long-term positive would likely overwhelm the short-term impact of these temporary lockdowns. Of course, there is no guarantee that the results will be unequivocally good – far more likely they will be nuanced.
Our view of this period of time when we have the EU/UK trade talks coming to a conclusion, the US election, the vaccine results and now a new lockdown has been that things are likely to be volatile.
However, we have said it is unclear that this period will lead to a leg down for markets, rather there is likely to be sharper moves in both directions as the market looks for longer-term direction and digests all the news going out.
So perhaps the best advice is to remain calm. In a few weeks’ time the environment should be clearer.
In the meantime, we are comfortable that our diversified portfolios, which lean towards the highest-quality businesses, are well-positioned for these turbulent times.
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