The UK government announced on Thursday that the lockdown period that has been in place since 24 March is to be extended for a further three weeks. The Health Secretary, Matt Hancock, stated that it was “too early” to make changes to the strict social distancing rules and that a further review of the policy will take place by 7 May.
There was, however, some quiet optimism that the curve of infections UK is beginning to flatten, with Chris Whitty, the Chief Medical Officer, stating “we are probably reaching the peak overall”.
While the period of lockdown appears to be having some success in limiting the spread of infections, it is taking a significant toll on the UK economy. Similar policies implemented around the world are expected to cause a global recession this year, with the International Monetary Fund forecasting a 3% contraction in global growth in 2020, made up of a 6.1% decline in developed markets and a 1% decline in emerging economies. While the IMF expects a recovery in 2021, global GDP is still expected to be lower than 2019’s level by the end of next year.
This concurrence between improving infections data and deteriorating economic data has raised the topic of exit strategies in recent weeks, as countries try to appropriately time and structure the reopening of societies. This represents a tight rope walk for politicians and policymakers as moving too early or by too great an extent risks a reacceleration of infections and potentially thousands of lives. On the other hand, moving too late could deepen the economic impact, increasing bankruptcies and unemployment, potentially destroying the livelihoods of many.
If the growth in infections, and then the flattening of curves represent the first two phases of the coronavirus crisis, then the exit strategies may represent the third, the success of which may prove crucial in either supporting or undermining the equity market rally that has taken place over the last few weeks. As with the earlier phases, the lack of historical precedent means that the uncertainty surrounding the success of these exit strategies is very high, with some Asian economies seeing increases in infections as restrictions have been eased. Measures are likely to be removed in stages and there may be a requirement to periodically tighten and then relax restrictions with the ebb and flow of virus outbreaks.
When thinking about equity investment against this backdrop, we return to our guidance of a couple of weeks ago that rather than being fearful of uncertainty, an investor should simply be aware of it and acknowledge that there are events which have a wide dispersion of outcomes and are therefore extremely difficult to predict. Attempting to estimate the structure, scale and ultimate success of exit strategies would, in our opinion, fall into this category. Indeed, this week we have heard from a number of global businesses, with feet on the ground in regions at various stages of the epidemic, and they concede that they have very little insight into how this crisis will play out over the coming months.
Instead they focus on remaining flexible, all the while attempting to look through the uncertainty surrounding the outbreak to consider the long-term implications on their business. And we seek to do the same from an investment perspective. We have limited insight when it comes to predicting the outcomes of certain events and the short-term direction of markets, and instead focus on attempting to gauge the new trends that are likely to arise from the crisis and the already developing trends that are likely to be accelerated, something that we have more confidence in doing.
Should you have any questions about anything raised in this article, please don’t hesitate to contact us via email, or on 0207 337 0777.
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