Multi-Asset

Mutant virus forces Boris Johnson to cancel Christmas

Macro Update 21 December 2020
December 2020

Risk Disclaimer 

Past performance is not a guide to future performance. The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

 

The markets have taken a bashing on the news of a much more infectious strain of the virus in the UK, centred around London. British Airways’ parent IAG opened this week down 12.6%. European markets were around 3% down, and oil prices fell 6%. The dollar strengthened in this risk-off move, meaning US investors lost even more on their unhedged investments in Europe – 5% on the Spanish IBEX and 4% on the FTSE 100.


It’s undoubtedly bad news…but we explain why it might just be a buying opportunity.

 

Let’s start with the facts

The UK government’s scientists are ‘moderately confident’ that the new strain is more infectious, between 0.4 and 0.9 more, based on the rise in new cases in London. It’s hard to disentangle other influences – notably changes in behaviour, weather and so forth – but lab experiments by Cambridge University suggest that it might be twice as infectious, consistent with the top of the range. But even if we take the lower end, the immediate impact is dire…the government was struggling to keep the R number below 1 even without the new strain. The sudden U-turn by Boris Johnson over the Christmas lockdown relaxation and the dramatic ban by foreign governments on travel from the UK reflect the seriousness of the threat. 

 

Reasons for optimism?

Tentatively, yes. First, there is no evidence that the new strain leads to more severe illness. More information from the fatality statistics will be available in the next week or two but experience with other viruses shows that when mutations become more infectious, they often cause less severe illness. Second, there is also no evidence that the new strain is more resistant to vaccines. The Oxford vaccine trials are being closely examined to check this out. Of course, the evidence may change. It’s early days but my guess is that this mutation won’t change the timescale of ultimate victory against this dreadful disease. But it does mean that we’ll have to suffer more pain, more overcrowded hospitals and more deaths. And that means weaker economic growth and lower corporate profits. This setback is a good test of the ability of the markets to look through the bad news with a recovery still likely during 2021.

The markets would get a boost if, as we expect, the UK government approves the Oxford/AstraZeneca vaccine for emergency use in the next few days. Remember that production plans for this vaccine exceed all the others put together. And it’s especially important for the UK because the Pfizer vaccine will be sufficient for less than one-third of the UK population and even with the Moderna vaccine due for delivery in March, we still need more. It would also be good news for India which has a contract to produce 1 billion doses of the Oxford vaccine in 2021. Meanwhile, the roll out of the Pfizer vaccine in the UK and US is going surprisingly well.

There are currently numerous vaccines in late stage trials, with Johnson & Johnson’s single dose version results due next month. Some are likely to be more effective than others against different strains. The virus will continue to mutate and even if this strain fails to reduce vaccine efficacy, other mutations will probably be more successful. But these new vaccines can be tweaked much more rapidly than the traditional ones, and a cocktail of vaccines may eventually be needed.

The virus has certainly won an important battle in the UK but I remain confident of eventual victory. And if I’m right, the weakness today will indeed prove to be a buying opportunity.

 

Optimism elsewhere

The mutant virus has dominated news that the US Congress have agreed a fiscal package that is enormous, except by comparison to the packages earlier this year. And there are signs that Brexit talks are continuing.

 

Goodbye for now

This is my last video of this terrible year. I’m glad that so many of you find them useful – we’ll be back in the New Year. Meanwhile, I hope that you have a peaceful and relaxing break. See you again in 2021.

Steven Bell

Managing Director, Portfolio Manager & Chief Economist, Multi Asset Solutions

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Risk Disclaimer

Past performance is not a guide to future performance. The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

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