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By Shaan Raithatha, economist for Vanguard Europe.


Financial markets are forward-looking. It is why there may appear to be a disconnect between the dreadful economic data currently being published (which captures the past) and the degree to which asset prices have been holding up.

Given the sharp contractions in economic activity we are observing, the threats of secondary Covid-19 outbreaks and growing numbers of infections globally, it’s fair to say that a significant number of  investors seem relatively hopeful about the economic road ahead.

But the spread of Covid-19 doesn’t affect all sectors of the economy equally. Those industries that require a more personal touch are much more vulnerable than those that can operate well despite the social distancing measures in place. This is reflected by markets with some sectors faring better than others, highlighting the evergreen benefits of a suitably diversified portfolio.

FTSE World Index total returns year-to-date by sector

FTSE World Index total returns year-to-date by sector

Past performance is not a reliable indicator of future results. Source: Bloomberg. Period covered is 31 December 2019 to 23 June 2020. Total return includes dividends reinvested.

One of the most important factors determining the extent of the contraction in economic output is the strictness of each government’s lockdown measures. We can see this by plotting the yearly contraction in industrial production and retail sales in April against a measure of how strict the lockdown was during that month, as measured by the Oxford Covid-19 Government Stringency Index.

How lockdowns have reduced activity

How lockdowns have reduced activity

Source: Oxford Covid-19 Lockdown Stringency Index, Bloomberg, Vanguard calculations

And unsurprisingly, that correlation is strongest in those areas of the economy that rely most on human interaction. Retail and recreation is a case in point. As the table below illustrates, this is showing signs of renewed life across Europe and should continue to pick up as lockdowns are eased.

How economic activity is picking up

How economic activity is picking up

Source: Google Mobility Data. Data period from 22 March 2020 to 14 June 2020. Notes: Google Mobility Index: Retail and Recreation, 7-day rolling average. Mobility trends for places like restaurants, cafes, shopping centres.

However, we’re still not at pre-virus levels in most of these countries. Germany, France, Italy and Spain are experiencing activity between 10 and 30% below the levels reached in February. And in the UK and Ireland, where lockdown restrictions are stricter, activity is 40 to 50% lower.  The shock to demand is expected to dissipate very slowly as the consumer ‘fear factor’ persists. 

And this dovetails with a recent poll from YouGov, which suggests that many consumers will still be reluctant to commit to a host of activities for the foreseeable future, even after the 4th of July, when lockdown measures ease further.

Lingering fear factor

Lingering fear factor

Source: YouGov survey conducted on 2-3 June 2020 on 1709 adults in the UK

So as temperatures pick up across Europe and borders reopen, it highlights the limitations that could hold up other key industries, notably tourism and travel. In this respect, countries like Portugal, Greece and Spain but also Italy, with their relatively large tourist sectors, evidently have most to lose. 

Financial markets are rightly looking ahead to the economic recovery and the improvement in business conditions that it will bring. Even so, we expect demand will take longer to recover than supply due to lower incomes and a lingering consumer reluctance to participate in perceived risky activities.

In addition, the risk of a second wave of infections looms large and may prompt further local, or even national, lockdowns in the future.

Given the large degree of uncertainty inherent in the outlook, we expect short and sharp spikes in volatility over the coming quarters. Investors may be able to capitalise on these periodic episodes of volatility. Attractive opportunities are likely to arise, particularly as the Coronacrisis will not affect all asset classes, sectors and regions equally.

Investment risk information:

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Past performance is not a reliable indicator of future results.

Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.

Other important information:

For professional investors only (as defined under the MiFID II Directive) investing for their own account (including management companies (fund of funds) and professional clients investing on behalf of their discretionary clients). Not to be distributed to the public. In Switzerland, for professional investors only.

The material contained in this article is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.  The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority. Issued by Vanguard Investments Switzerland GmbH.

© 2020 Vanguard Asset Management, Limited. All rights reserved.

© 2020 Vanguard Investments Switzerland GmbH. All rights reserved.