Does freedom seem a long way off?
We explore the stock market implications of the spread of the Delta variant of COVID-19.
It’s arguably not the best start to Freedom Day when three senior members of the UK Cabinet, including the prime minister, are self-isolating. But the spread of the Delta variant is already threatening a full return to economic activity and investors, understandably, are becoming slightly cautious.
The underlying problems of this new COVID strain are twofold. First, the Delta variant appears to be significantly more infectious, with the disease spreading at least twice as fast as the original strain. The types of social-distancing measures needed to control it would therefore be much more severe in our view.
The hope is that vaccinations will stop the disease from spreading even further, but that brings us to the second problem: statistics suggest that vaccines are somewhat less effective against the Delta variant.
A global challenge?
So, what does all this mean for different countries? Three main issues concern us.
Firstly, for countries with low current vaccination rates, an eradication strategy is harder to achieve and so there’s a greater chance of lockdowns and associated economic slowdowns. For example, Australia, New Zealand and Japan have less than 20% of their populations fully vaccinated. Just last week, Japan announced spectators will be largely barred from the Tokyo Olympics, while half of Australia’s population is now in lockdown.
Second, for countries that are reopening, cases may rise rapidly. Even with high vaccination rates, hospital capacity could be tested. The UK is a guinea pig here, of course, as the government ends its social-distancing restrictions. Our base case is that UK infections increase rapidly through to early August and could surge to levels that are a multiple of previously recorded daily cases. The good news is that full vaccination is estimated to reduce hospitalisation risk by 90% or more, but there could still be strain on the NHS with such high infection levels.
Finally, there’s a wider question on vaccine efficacy. For example, in Chile – where one of the vaccines developed in China has been used extensively – deaths are surprisingly high, which is a worrying sign. That said, looking at hospital data, it is predominantly people aged below 50 who are ending up in intensive care, which seems to imply the surge is being driven by less vaccinated, younger age groups. That in turn is supportive of the vaccine’s effectiveness. But this trend needs careful scrutiny as there would be severe economic risks, in our view, if the more infectious strain and lower vaccine efficacy combined to cause wider lockdowns and disruptions, in China in particular.
Implications for investors – stay diversified?
Given the range of different risks outlined, investors who are concerned about them may wish to implement a range of different investments to avoid placing too much weight on any one of these risks materialising. While diversifying among different investments does not guarantee against loss of capital, our view is that it can reduce the dominance of any one single investment.
Remember, the value of any investment is not guaranteed. The value of investments and any income received from can go down as well as up and you may not get back as much as you had originally invested.