Short-Term Uncertainties as COVID-19 Cases Spike

COVID-19 fatalities have surpassed 1.5 million globally and hit a single-day high in the United States on 3 December. This new wave of infections raises questions over short-term market implications.

With intensive care units (ICUs) nearing capacity in some regions, renewed lockdown orders look likely to increase. The United States and many other developed nations are struggling to slow the rate of infection, with seasonal aspects likely playing a part; many medical professionals cite a higher likelihood of the virus spreading during the winter months with increased indoor activities and holiday gatherings. We’ve also observed many citizens experiencing general compliance fatigue.

In the near term, we continue to expect a seasonal upsurge in COVID-19 cases to impact consumer behaviour. Where hospitals are nearing capacity, an unwelcome return to local and regional lockdowns may still be necessary. For example, in the United States, California’s governor recently announced plans to impose stay-at-home orders on a regional basis when ICU capacity falls below 15%. We’d expect other states to follow suit with similar restrictions if and when required.

We do not know how long these measures will remain in place, or in how many countries. And it is also unclear to us how much the inevitable hit to national output, as measured by gross domestic product (GDP), will impact financial markets. But additional measures should prove a strong headwind to growth.

However, given optimism over fiscal support and an eventual victory in the fight against the virus—bolstered by ample liquidity to soothe markets in the interim—equity investors may choose to look through any near-term hit to revenues. This all contributes to an outlook that remains mixed in the near term, even as our optimism builds for the longer-term outlook.

Will Lockdowns Lead to a Double-Dip Recession?

While a vaccine is on the way, its availability may actually induce governments to pursue short-term lockdowns—and additionally may encourage households to comply—since there is a perceived ‘light at the end of the tunnel’. We note that lockdowns and other restrictions are not uniform within or across countries. From a regional basis, Europe’s most recent lockdown appears more restrictive than in the United States overall. But, there are notable differences between how various countries are imposing restrictions—and even within various regions and cities within them.

Increased lockdowns will likely perpetuate the goods versus services divergence within economies, as restrictions continue to impact many high-touch services (e.g., gyms or hair salons) while essential goods see high demand (e.g., toilet paper and groceries). It is even possible that GDP will experience a negative reading in the fourth quarter of 2020. We continue to focus on the need for ongoing policy support, even as the worst phase of the coronavirus recession passes.

The coordinated policy response we saw in 2020 eased the path through a deep global recession and allowed investors to look ahead to a period of recovery and rebuilding. We remain optimistic that stimulus will be provided when needed, but we are increasingly concerned that its delivery will be reactive rather than proactive.

Investment Implications  

As investors, we seek to understand the dynamics among the varied restrictions, the potential economic recovery scenarios, and the continued decoupling of economic fundamentals with equity markets. Within equities, we favour opportunities which are tied to future economic growth. These include investments in countries suffering less from COVID-19, such as  China, South Korea, Japan and Australia.

Regions which are suffering the most from COVID-19, such as Europe, the United States and Canada, may continue to struggle. In our view, value-oriented equities and commodities, including energy and industrial metals, will likely come under renewed pressure should lockdowns intensify.

A Brighter Future

A post-pandemic recovery is dependent on a number of indicators, including testing rates, hospital utilisation capacity, policy developments, and monetary and fiscal support. Assuming no safety issues derail plans, it is likely that large numbers of the most vulnerable members of society will be able to receive vaccinations in the first half of 2021. This will finally lift the dark cloud that has hovered over the global economy during 2020.

However, uncertainty remains with us for the rest of the year, so we’ll continue to watch crucial economic data points that may steer the economy. While near-term risks moderate our enthusiasm, we are prepared to take a more decisive stance, reflecting longer-term optimism. We continue to believe that navigating the challenges presented in the months ahead will require nimble management.

Want to know more? Read the team’s latest “Allocation Views.”

What Are the Risks?

All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Investments in fast-growing industries like the technology sector (which has historically been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasising scientific or technological advancement. Value securities may not increase in price as anticipated or may decline further in value. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments.

Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Smaller company stocks have historically had more price volatility than large-company stocks, particularly over the short term. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline

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