At the crossroads in a lop-sided world

As worries grow over the resurgence of Covid-19 money printing is likely to continue. Expensive sectors - and their equities - may get more expensive still.

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  1. Charles Stanley

There are two main drivers of current markets – and two big cross currents that are affecting relative valuations.

The overall level of markets is driven upwards by massive injections of new cash from central banks, as well as tax breaks and public-spending boosts from governments. Meanwhile, markets are pushed downwards from time-to-time by the continuing bad news of the circulation of the virus – and the responses most governments pursue in the name of saving lives which do economic damage. Today, confidence is being dented again by more lockdowns.

The digital and green revolutions provide pressures on relative valuations. Both these movements have been accelerated by the pandemic, and both have led to extreme movements upwards in the winners and downwards in the losers against the background of easy money and poor economic prospects.

Infections on the up

Today Covid-19 is having a second wind in many countries. Cases have been rising rapidly in Europe and the Americas in particular. China is the stand-out large country which has the virus under good control, according to the official figures, though even there some more cases are now being reported.

In some places, cases numbers have risen to higher levels than were recorded in the spring, but deaths so far are mercifully lower. Some say this reflects a younger age of patients and better treatments. Others fear it just means there are lags before the death rates catch up with the infection rates.

Most governments remain alarmed by the virus, and most are taking further measures to reduce social contacts and slow down or lockdown business activities that thrive on people meeting. The more involvement a government has in running its health services, the more nervous it is about the prospects.

Ireland has announced a new lockdown lasting for six weeks. People are told to stay at home unless their work is essential and cannot be done from their living room. No-one is to travel more than 5km from their home. Restaurants and cafes can only offer a takeaway service, all non-essential retail is shut – and public transport will operate at 25% of its previous levels.

In France, a six-week curfew sends people home at 9pm. In Italy, bars and restaurants are required to end table service at 6pm – whilst all cinemas, gyms and theatres are closed. The death rates are climbing again. In Europe, including the UK, Belgium is still the worst by a long way – at 92.8 deaths per 100,000 people – followed by Spain at 74.4.

We need a sense of perspective too

Whilst this illness is a severe and potentially lethal one for a few, the death rate so far is 0.015% of the world’s population. Peru has the highest recorded rate of the larger countries at 0.106%, with Belgium second at 0.091%. The UK and US are at 0.06%. It is true that a worrying 1.14 million people have died worldwide this year following a bout of the virus, though many of them also suffered from other conditions, which are themselves possible causes of death. This compares with more than 55 million deaths a year worldwide from other causes, including 18 million deaths from cardiovascular problems, and 1.2 million deaths a year from road accidents.

The politics of the virus are now more polarised. Gone are the days when governments basked in sky-high ratings for leading policies based on national unity to fight the virus with stringent lockdowns and the isolation of most individuals and families. The minority that always thought the dangers of the virus exaggerated – and wanted to avoid the lockdowns – is now growing and is more vocal. Donald Trump speaks for these people.

The minority that was always very worried by the virus and wanted as many as possible to lockdown, not just the vulnerable, are still with influence in scientific and world health circles. They have Joe Biden as their global champion. Politics is about whether politicians should do more to save lives or livelihoods, with strong arguments about whether they can do the former and at what price.

There is only a modest discussion of an exit strategy and limited debate about silver bullets. Statesmanlike comment usually prevails, with disclaimers from most that there is no one single policy or silver bullet which will end the crisis – and there is no guarantee we will soon have a vaccine that can be rolled out universally at speed to end the controls over people's lives.

Nonetheless, governments seem to have the belief that there will be vaccines in the new year, that these can be scaled up quickly – and that, in due course, they will permit some relaxation of controls. Even tone-deaf governments in the free world must be hearing the growing voices of those who want to do more to save livelihoods, but it often just leads governments to express more optimism about a great escape using a vaccine.

There has also been a strong belief that good track and test schemes can limit the infection’s spread. Now there are worries that, in many locations, too many people do not wish to co-operate with these schemes if it means stopping work or disrupting their complex family and social lives. There are also technical issues about the reliability of the computer back-up – and even about the accuracy of some of the tests.

So, what are we to make of this dismal background as investors?

We need to factor in more months of Covid-19 scarred economic activity. We are in an upswing for more lockdowns and partial closures – which in turn reduce consumer confidence, limit the ability to spend and skews economies back to the online at home-world of the spring.

It will need more government and central bank stimulus to see us through with limited damage, and to sustain share markets at current levels. It also means a continuation of the pressures against early recovery of the old economy companies as the digital and green revolutions power on, not wishing to waste the opportunities the crisis has presented to them. Expensive sectors and equities can get more expensive still in this lopsided world.

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