Virus versus a vaccine

Macro Update 7 September 2020


It’s back to school week in the UK, US and many other countries, but the real nerves have been in financial markets. The NASDAQ plunged by 10% within a single trading session. There was bad news on the virus, as new cases rise in the UK, France and Spain, but good news – or at any rate, hope of good news – on a vaccine. And Brexit hits the headlines again – not positively. All this meant that the massive decline in US unemployment was overshadowed – usually this would be front-page news.

First and foremost, treat those statistics of new cases in Europe with care. We’re familiar with the idea that more testing inevitably means more cases will be identified. That’s why we monitor the percentage testing positive. But more efficient testing, in the sense of targeting those that are more likely to have the virus, will also increase the number of cases even if the true rate of infection hasn’t changed. And that’s what contact tracing does.

How big are the virus data biases?

We can gauge this from the UK Office for National Statistics community study, which uses sophisticated sampling techniques to measure the true rate of infection amongst the general population, not solely based on hospital cases. The latest figures show a low and stable rate of infection; out of more than 150,000 people that they tested, only 71 came up positive. And 80% of those had no symptoms.

And Covid has become a disease of the young. In Spain, for example, roughly half of those infected in the first wave were over 60. Today, it’s just 16%. This is part of the reason why the rate of hospitalisation and fatality rate are a tiny fraction of the levels seen in Europe’s first wave.

There is good news, but we still need a vaccine for full recovery

All this is good news. But the young can still infect the old and so long as the virus is circulating, social distancing will limit the extent that the global economy can make a full recovery. We need a vaccine, and of the chances are very good that we’ll get one; what was once a distant and vague hope now looks like a racing certainty.

The market is only just beginning to wake up to this. A recent survey suggested that only 38% of investors expect a vaccine within 6 months. But that’s up from only 12% a month ago.

Financial market fundamentals

Let’s leave the virus and take a look at financial market fundamentals. First, the gyrations in the NASDAQ. It seems clear the Softbank have been taking massive option positions in single stocks – tech stocks like Tesla, which rose by 75% in August and has lost 16% since. This also explains why the VIX index of volatility has gone up even as equities rallied in recent months – the reverse of the normal pattern.

Leaving aside the machinations of option trading, the reality is that the world economy has been recovering much faster than most analysts expected. Despite the seconds waves, the US economy in particular has been doing well. Europe, which once looked set to speed past the US, has actually slowed a little. But the general picture is of a global economy that is recovering well. And that feeds through into corporate earnings, where the once-bleak outlook is now brightening.

The UK: Brexit a black cloud, but silver linings for the economy

The Brexit talks have stalled, and the risk of no deal has risen. But both sides do want a deal and that still looks like the most likely outcome. More importantly, despite all the pessimism, the UK economy is doing well. We’ll get GDP data for July this week and it could jump by around 8% in just one month. ‘Eat out to help out’, the stamp duty holiday and pent-up demand have all worked wonders. Even our cricket team are doing well!

So, we are still pro risk and pro equities, and negative on bonds. There is still volatility in markets, but we do think this is the best strategy for now.

Steven Bell

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


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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