Preparing for a second wave

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31/07/2020
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As the fabled John Snow from Game of Thrones famously said, “winter is coming”. A fact that has not been lost on the U.K. government who are preparing for a potential second wave of COVID-19 this winter.

This has included an additional £3 billion (Bloomberg) in funding for the NHS, to help get it through the winter period, already a stretch without the threat of COVID- 19. The table below is an illustration of data produced by the academy of medical sciences, as requested by the UK's chief scientific adviser, Sir Patrick Vallance. The report stresses there is still a high degree of uncertainty over how the coronavirus pandemic will play out this winter however, coronaviruses tend to have a greater impact when temperatures fall so a second wave could be likely.

The impact of adverse winter weather on human diseases and access to healthcare and NHS logistics. + low impact; ++ moderate impact; +++ high impact

 

It is, of course, impossible for anyone to predict the direction events will take, hopefully we will not see another peak in cases as we move towards the end of 2020, but as the government prepares it seems sensible that investors should do the same.

Some of the themes that played out in the first lockdown could help investors foresee what businesses may be able to weather the storm and those that would be severely or mortally wounded by a second lockdown.

Shift to online accelerated

Traditional high-street retailers who have already been hit hard by the first wave would be extremely vulnerable to any second lockdown. Specifically, those businesses with little to no online presence would find themselves devastated by a lockdown. This would be particularly true in the period leading up to Christmas, a time vital, as it is when a significant proportion of the year’s sales take place.

The chart below shows how both ASOS and Marks and Spencer fell during the initial lockdown. It was ASOS however which recovered quickly as public spending shifted online. This shows that on the flipside, those retailers who are set up for online retail could weather the storm of a second lockdown or potentially benefit.

 

ASOS and Marks & Spencer comparison

Gold continues climbing

Gold is making headlines again as it continues to rise during record low interest rates and with central banks around the world carrying out unprecedented monetary stimulus. It appears even without a second lockdown, the likelihood of more stimulus from central banks and government schemes in order to aid with the continued economic recovery will be needed. In this type of environment gold has many of the desired qualities an investor may look for, acting as a store of value against any sign of future inflation. Indeed, the resulting stimulus from the first lockdown has boosted the value placed on the precious metal considerably. It is likely this trend would continue further and faster were we to see a second lockdown this winter.

 

Gold continues to rise

Resilience has a new value

Post COVID-19, it appears companies that show resilience and can withstand these kinds of shocks now have a greater value placed on them than pre-pandemic. Unilever is one example of a company that has shown itself to have these types of qualities that investors are now seeking. Although many parts of its business were impacted during lockdown, some areas such as household cleaning products saw a significant uptick in sales. Many of Unilever’s food brands also flew off supermarket shelves as people spent more time eating at home. The chart below demonstrates this resilience. Unilever fell less than the wider market and has since recovered its initial lockdown losses.

 

Unilever market resilience

 

In conclusion, it’s important to note that any single company can have any number of unknown factors that can affect its share price, which is why a diversified portfolio can be beneficial. As active investors it is important to think about what events could unfold and therefore how a portfolio can be positioned best in order to protect on the downside and take advantage of any opportunities on the upside. The themes highlighted above that we saw unfold during the start of 2020 could strengthen further if we were to see a repeat situation this winter.

 

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