Lightening the load

author blog

Personal Investing

17 August 2021

'Slightly more cautious' is how we’d sum up our thoughts on global stock markets as the Delta variant of COVID-19 spreads.

Investors have been in mostly optimistic mood since the start of the year, particularly in the US and Europe, despite the worldwide spread of the Delta variant. That said, we’re becoming more cautious about the threat that Delta poses in China, something which we don’t believe investors are taking into account currently.

China has adopted a zero-tolerance approach to coronavirus and has a relatively low rate of vaccinations. As the government is focused on using vaccines developed in China, which local authorities believe have fewer side effects but whose effectiveness is yet to be proven, it has a strong incentive to keep fighting the virus with hard and potentially economically disruptive lockdowns.

Although it’s early days, unfortunately the variant seems to have spread too far in the world’s second-largest economy to be easily contained with regional measures. Delta cases have now been reported in over half of China’s provincial-level regions*, including Beijing, with over 90% of the authorities now warning against unnecessary travel. If further restrictions are imposed, we believe this could lower the rate of Chinese economic growth.

A slower rate of economic growth in China would, in our view, impact the economic health of the rest of the world, most notably for countries which produce goods such as oil, wheat, soya, copper and iron ore (goods known collectively as commodities). If China consumes less of these goods, as the world’s largest buyer this may impact commodity producers. This may also have knock-on implications for other economies around the world.

As a result, we are lightening our optimistic take on stock markets and believe this is a prudent step for now, while the economic impact of the Delta variant is still unknown.

The Delta variant and the US

Some commentators may disagree with our slightly cautious stance given the variant is spreading in the US and other parts of the Western world and stock markets don’t seem to be affected.

Of course, we don’t know for sure how the story will unfold but the Delta risk in the US is unlikely to lead to lockdowns, in our view. The worst-hit states are also the most reluctant to impose restrictions. Florida is a good example. Hospitalisations there, due to COVID-19, are running at their highest rate since the pandemic began, but the state’s governor refuses to even consider a mask mandate. The US stock market, it seems, can continue to focus on the light at the end of the tunnel given the pace and, just as importantly, the proven efficacy of vaccine programmes in the US.

All said, we are not turning negative on stock markets as we believe there are other supporting factors. Consumers have accumulated savings to spend, and authorities are still extremely supportive in terms of pandemic-related relief. Furthermore, a slowing in economic growth is not necessarily a bad thing for stock markets.

In summary: we are slightly more cautious than we were in our outlook for stock markets, but by no means negative.

*China consists of 22 provinces, 5 autonomous regions, 4 municipalities under central government control (Beijing, Shanghai, Tianjin and Chongqing), and 2 special administrative regions (Hong Kong and Macau).

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.

There is no guarantee that any forecasts made will come to pass.