Markets have continued to be relatively range bound again this week, with concerns over Covid-19 case growth in the US weighing on sentiment, offset by hopes for further monetary and fiscal stimulus. The exception has been in Asia, particularly China, where we have seen a very strong week for equities seemingly based on increasing confidence over the economic recovery and this is in line with our market views and recent portfolio changes.
We continue to see steep rises in the number of coronavirus cases but the impact on markets appears contained given that we are yet to see a significant and sustained follow through from higher cases to higher mortality rates in the US. Given the time lag between the rise in cases and mortalities, evidence from the first phase of the virus back in March/April would suggest that we should by now be seeing far larger increases in the number of mortalities as a result of the recent acceleration in cases, particularly in California, Arizona, Texas and Florida. A total of 41 states in the US are currently said to have a R rate (transmission rate) above 1, meaning the virus will continue to spread at an increasing rate. The short-term increase in cases is certainly bad from an economic point of view in terms of slowing, and indeed reversing, plans for reopening, but some comfort can be taken over the longer term if the rise in cases continues not to translate into higher mortalities in the US. This can be put down to a number of factors, primarily the improved medical treatments as the understanding of this disease improves. Secondly, medical facilities have not yet been overwhelmed, meaning patients have been able to access the treatment they need. Thirdly, the proportion of younger people being infected is higher – for example in Arizona, 61% of cases are in people under the age of 44 and below this age the mortality rates are extremely low.
It is also worth remembering that while we have seen the virus pass through Asia then Europe and into the US, we are still seeing significant case growth in Latin America, India, and parts of Africa. The Brazilian President, for a long time a sceptic of a virus he described as “a mere sniffle” and a “little flu” announced he had tested positive for Covid-19 this week. The World Health Organisation yesterday warned that outbreaks are “not under control in most countries” and the pandemic is still “accelerating globally”. The Economist reported the research of the Massachusetts Institute of Technology that based on data from 84 countries suggested that for every confirmed case, a further 12 go unrecorded, and without a medical breakthrough, total cases will climb to between 200 million and 600 million by next spring. Economies and society will continue to adapt, though there remain significant risks from heightened unemployment weighing on economic growth and the ongoing impact of social distancing and localised lockdowns on consumer spending.
This week in the UK we saw a ‘summer economic update’ on Wednesday, where the Chancellor announced firms would be incentivised to return to employment staff that are currently furloughed. There will be a £1,000 payment early next year for each member of staff returned from Furlough if certain conditions are met. Other measures announced included a temporary Stamp Duty cut and also a VAT cut for hospitality, accommodation and attractions, along with incentives to ‘eat out to help out’ during August. The Chancellor noted that over the medium term “we must, and we will put our finances on a sustainable footing”. The Treasury’s economic support measures to offset the impact of the pandemic and lockdown are now estimated at £189 billion.
We have not heard a great deal of news on potential vaccines in recent weeks but a huge amount of work is going on, and indeed it appears the Oxford University vaccine trial is well ahead of rival countries, with a vaccine potentially available before the end of the year. While any vaccine would obviously take time to roll out, from a markets point of view, this would be the proverbial ‘game changer’ in allowing investors to look through the current economic weakness to a recovery in confidence and a far swifter return to ‘normal’ than expected. Given the huge levels of monetary and fiscal support, the recovery would likely be sooner and more robust as well given that consumers and businesses could look forward to normal times returning and spend with confidence.