06 October 2020
By Ken Rayner, Verbatim RSMR Model Portfolio Manager
With the easing of lockdown measures and the reopening of schools, the number of cases of Covid-19 in the UK has jumped significantly in the last month. Despite errors in the reporting of the daily statistics, the daily rate has jumped to approximately 12,500 cases, scary stuff when you consider that confirmed cases in April peaked at 6,200 per day. With the R rate recently increasing, possibly as high as 1.7, some believe that this is the start of the second wave.
Despite these alarming figures, the death rate remains relatively low. To put this in perspective, the daily death rate peaked at 1,172 on 20th April but now stands at approximately 70, having risen from single figures in August. A closer look at the data is needed to understand what’s going on. Data in March and April was based on confirmed cases tested in hospitals. Many people with symptoms were not tested at that time and it’s thought that the actual infection rate was much, much higher, possibly as high as 100,000 cases per day.
Cases now are confirmed by a much wider testing regime, capturing a truer picture of the spread and making the comparison with figures back in Spring somewhat inconsequential. With society adapting to socially distanced ways and the elderly isolating, the death rate has stayed relatively stable. Treatments are also having a significant impact and are improving the survival rate. Increased mixing in schools and universities means that cases are now concentrated in the healthy and young, a category that doesn’t tend to have the co-morbidities that can lead to death from coronavirus.
The government hasn’t introduced another national lockdown but has relied on local measures to supress the hotspots, minimising the damage to businesses caused by a full shutdown. Over the first half of 2020, the UK economy saw a 22% fall in GDP, but since then has staged something of a recovery. The bounce back from a GDP shock caused by structural circumstance, such as the Great Financial Crash, can be prolonged and slow but when the fall is caused by an event, the recovery tends to be much sharper and faster. The bounce back has in part been due to pent up demand such as car and house purchases that couldn’t happen during the national lockdown, however, there is significant, permanent loss to the GDP in terms of businesses that have closed or products that are no longer in demand due to lifestyle changes.
Some areas of the market are now recovering more strongly than others. The Purchasing Managers’ Index (PMI) measures the prevailing direction of economic trends in the manufacturing and service sectors. The value and movements in the PMI and its components can provide useful insight to business decision makers, market analysts, and investors, and is a leading indicator of overall economic activity in the U.S. The headline PMI is a number from 0 to 100; a PMI above 50 represents an expansion when compared with the previous month and a PMI under 50 demonstrates a contraction. Recent data shows that the PMI is currently around 54, indicating a discernible recovery.
Companies with robust and resilient business models quantified in the quality aspect of the market will no doubt be the survivors. In market falls, certain factors such as quality and liquidity, tend to be more resilient and perform better. This is reflected in our quarterly asset allocation views. Across some of our portfolios, where we have a balance between investment styles, we have accentuated the quality and growth elements where appropriate.
Six months after the World Health Organisation declared Covid-19 a global pandemic, responses to the latest McKinsey Global Survey suggest a positive shift in economic sentiment. More than half of all executives surveyed say economic conditions in their own countries will be better six months from now, while 30 percent predict that they will worsen. That’s the smallest percentage of pessimists we’ve seen since the survey in April 2020.
We’ve learned much about the natural history and epidemiology of Covid-19. We’re developing better diagnostics; case management has improved, and pharmaceutical companies have turned out a remarkably robust pipeline of vaccine and therapeutic candidates. Put it all together, and an end to the pandemic is potentially within range. The economic slump of 2020 may have been the steepest in history, but the recovery is now underway.
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