New strain, new pain

The year 2020 has been a remarkable one to say the least, with the global spread of the Covid-19 virus being the limelight. Just as the world was getting confident that the worst is behind us, Mother Nature decided to throw us one last curve ball for the year and mutate the deadly virus into a seemingly more easily transmissible one.

Health authorities are yet to unveil whether this new strain is more deadly than the strain that spread at the start of the year; however, statistics show that this new strain has become the predominant version in circulation in the UK over the last few months. Crucially, medical professionals believe that the vaccines, which have recently been approved worldwide, should still be effective against this new strain. Despite this, the numbers of cases have grown exponentially and are now at a critical level.

The result of this has been back-tracking by UK prime minister Boris Johnson’s promise of no lockdown during the Christmas period, as the country battles the surge of infections which are currently “out of control” according to health secretary Matt Hancock. As I write, European governments are moving swiftly to ban flights and movement from the UK and introduce damage limitation measures, with France going one-step further and banning freight transport via the English Tunnel.

The news has inevitably led to European stocks opening lower this morning, despite the US lawmakers’ agreement over a $900 billion stimulus package over the weekend. The package includes more relief for small businesses and renewed direct payments to American families suffering in the coronavirus pandemic. The package also includes more funding for the distribution of the Covid-19 vaccination, food programs and federal support for renters as well as remote work and study assistance.

Inevitably travel and leisure stocks were impacted the most by the actions taken the European governments. Bank stocks, which are considered to be sensitive to economic fluctuations also took a hit, as for many small businesses the Christmas period is often a make-or-break period in terms of financial performance. Investors shifted into assets considered to be shelters during times of weakening sentiment, pushing the dollar and the price of US government debt higher.

If this pandemic has thought us one thing, it is that the spread of the virus worldwide is almost inevitable; therefore, in my opinion it is only a matter of time before other countries report the new strain. The most important question is what the ultimate effect of this new strain will have on government actions.

The immediate effect is renewed restrictions to social interactions in order to keep health institutions afloat and avoid unnecessarily high death rates. However, this pain will be short lived once the vaccine rollout gains momentum in the first half of 2021.

With the information known as at today, the new strain may imply a more negative scenario for world economies for the first quarter of 2021 due to a more cautious government approach, however crucially the medium term expectations should not be impacted.

Additionally, fiscal and monetary support measures are firmly in place to cater for the financial burden imposed by the restrictions, therefore ultimately, despite it being an unwelcome development, in my opinion it should not be a cause for panic at this stage.

The silver bullet remains the mass rollout of the vaccine and its effectiveness against known strains. As long as we have that on our side, the timeline of a return to normality should not be significantly altered, therefore investors could selectively take advantage of weaknesses in financial markets that should convert from short-term panic to long-term common sense in due course.

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