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‘Lockdown for longer’ is a major market threat

Stock markets have risen on hopes that the spread of the novel coronavirus is starting to plateau but could trouble lie ahead?

Stock markets have risen o hopes that the spread of the novel coronavirus is starting to plateaux, but could trouble lie ahead?
Garry white employee

Garry White

in Features


Stock markets have staged a significant recovery from the Coronavirus slump, rallying sharply from lows hit in March. But gains of 10% or more are common in bear markets – and the crisis at many of the world’s businesses has only just begun.

A wave of insolvencies will puncture the optimism, as companies with too much debt fail to keep afloat. There will be some individual winners that have seen demand soar, but earnings will slump at most that escape going bust. In fact, the fall in company profits this year will probably be more severe than at the height of the last financial crisis.

People’s behaviour and spending will not return to normal after restrictions on movements are lifted. In Wuhan, where the lockdown has been eased, people are still cautious and are staying at home. All this pain will be reflected in economic data releases scheduled over the next six months. It’s hard to see the optimism surviving as the reality is being revealed.  

Data uncertainty

One of the main drivers of the recent market recovery has been positive headlines about easing infection and death rates in countries such as Italy. This news is, obviously, very welcome indeed. But the virus is still spreading in countries worldwide – and they are each using different methodologies to measure cases and fatalities.

Some countries also have bottlenecks in reporting, as saving lives is more important than paperwork when you are at the front line. Indeed, this week there have been estimates released that suggest UK deaths have been understated by about 15%. All of this means that infection and death rates are probably under-reported – and differences in the type of information collected means it’s difficult to compare data from one country to the next.

For an investor trying to make an informed decision, the data-uncertainty problem is all encompassing. The length of any lockdown will determine the extent of the fallout, but we still do not know how long these will last. This means that any forecasts of economic performance or a company’s profits are currently no more than guestimates. Nobody has the data from which they can make an accurate call.

Heath vs wealth

Governments have some very tricky decisions to make, as they attempt a delicate balancing act between health and wealth. In the UK, the initial lockdown was supposed to last three weeks, but a review of this decision has been postponed. Health Minister Edward Argar has warned that there is now no date set for a review. This recent market rally was also driven by hopes of phased releases from lockdown starting soon. Right now, this appears unlikely. We are probably going to see lockdowns for longer than hoped.

Restrictions on movement in France are set to continue. France went into lockdown on 17 March, and it has already been extended once to 15 April. But it is almost certain that there will be an extension, as prime minister Edouard Philippe has already warned. The Bank of France expects to see a 6% GDP contraction in the first quarter, the biggest slump since the Second World War. Even this could be optimistic and the impact in the second quarter will probably be even worse.

The spread of Covid-19 in the US is of great concern, given the country’s slow initial response, lack of testing and its economic importance to global trade and markets. The world’s largest economy has recorded by far the most Covid-19 infections of any country, with the total now almost five times that of China.

California, one of the country’s most significant economic engines, has not suffered as badly as places such as New York. But authorities indicate that its lockdown will be extended after they revised their estimate for the virus peak in the state from mid-April to the middle or end of May.  It is likely that there will be more restrictions introduced across America, as the need to slow down new infections there is acute.

Uncertainty abounds

So, we are uncertain about data relating to the number of infections. The economic implications of shutdowns remain unclear because there’s no way of predicting how long they will last. The impact on companies is therefore difficult to predict, even for the people running these businesses every day. Management at many companies have withdrawn guidance on sales and profitability, so analysts trying to work out what will happen to earnings have a challenge here too.

Even if restrictions on movement are lifted, we are unlikely to return to normality for quite some time. Economic data releases are only now starting to give an indication of the virus’s initial impact, but we are now entering a period of gloomy headlines as the data catches up with the acceleration of the crisis. The sharp rise in unemployment globally is also likely to hit consumer confidence, with spending being significantly reined in.

Given the speed at which the global economy is entering a recession we need the second quarter’s economic data and corporate earnings to be out in the open before a much more constructive stance is appropriate.   

A good rule of thumb is that equity markets tend to find a firm footing roughly one quarter before the end of a recession. This doesn’t look likely soon, although a buy signal will eventually materialise. However, this bear-market rally has provided investors with one opportunity: the jump in equities has given a chance to exit riskier positions in companies that are over-leveraged or face trouble ahead. Data uncertainty means now is not the right time to buy for the long term, now is the time to adjust and prepare. The chances of a new low remain high.

A version of this article appeared in Friday’s Daily Telegraph.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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