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With a second wave hitting Europe, how have policy makers and investors reacted?

25 September 2020

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Robert Clarke, Assistant Research Analyst 

After a summer of optimism, Europe is now having to come to terms with a second wave of the COVID-19 pandemic. The number of coronavirus cases have bounced back sharply across much of Europe, with Spain and France having seen the most alarming rise in new cases. Spain has been the worst hit; its 640,000 cumulative cases make it the first European country to exceed half a million[1]. While France has seen a +19% rise in its total number of cases in just the last 7 days[2]. In the UK, the number of new cases recently exceeded the previous peak set during the first wave in April[3]. Although the number of cases have continued to rise across Europe, both the number of hospital admissions and the death rate have remained subdued. It is a rise in the latter that policy makers are worried about, and hence the reintroduction of restrictions to prevent a significant rise in the number of deaths.

The difference this time around is that policy makers are armed with the knowledge of how extensive the damage can be from full-scale lockdowns. Economists at the Centre for Economics and Business Research (CEBR) conducted an analysis of the new measures to deal with a second wave of cases on the UK economy. Although the actual cost will not be clear for some time, the CEBR estimate that even a partial lockdown could cost the economy around £250m per day[4]. While it is roughly a tenth of the impact of the lockdown at its peak in April, it is certainly not immaterial and does not consider the knock-on effect to consumer and business confidence.

Policy makers are clearly trying to maintain the fine balance between disruptive full-scale lockdowns and the need to keep the virus from spreading uncontrollably. Strict lockdown measures have proven an effective method in reducing the spread of the virus, albeit at an enormous economic cost. As a result, policy makers seem to be relying on a mix of targeted restrictions this time around, as well as banking on a combination of greater hospital capacity and more sophisticated treatments to keep fatality rates in check.

In Spain, as in Britain and France, the infection is spreading most significantly among the under-30s, leading to night curfews and restrictions on the size of social gatherings; something that looks set to become the new normal across Europe throughout the autumn. Indeed, in England, pubs, bars and restaurants have to abide by a new 10pm curfew.

Setbacks in the efforts to contain the coronavirus pandemic have undoubtedly weighed on stock market sentiment. As of yesterday's close, European equities, as represented by the STOXX Europe 600 index, are down almost 5% so far this month. Unsurprisingly, the same sectors that suffered during the first wave, suffered once again. Airlines, travel companies and retail companies have been marked down, as investors recognised that the recovery in consumer discretionary spending was short lived.

As it stands, policy makers seem intent on not resorting to nation-wide lockdowns, to avoid their devastating impact on the economy, and society more broadly. We cannot be sure when the news on the virus will improve, or whether or not markets could fall further. However, throughout this period, we encourage investors to look through the noise and take a longer-term view. Although we can expect more volatility in markets, companies with high growth prospects, robust business models and strong balance sheets outperformed during the first wave, and we believe they will continue to do so during the second wave. We therefore continue to favour a selective approach to investment.

[1] https://covid19.who.int/region/euro/country/es

[2] https://covid19.who.int/region/euro/country/fr

[3] https://covid19.who.int/region/euro/country/gb

[4] https://cebr.com/reports/will-the-second-wave-stop-the-economic-revival-in-its-tracks/

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