Efforts across Europe to lift lockdown restrictions produced a positive reaction from markets as the week got under way.
UK Prime Minister Boris Johnson’s address to the country on Sunday included minor changes to the rules with more outside activity to be allowed this week but social distancing still in place for the foreseeable future. From an economic perspective, however, it was the PM’s urging of business to restart work that will have encouraged markets.
It isn’t only the UK that markets are watching, of course, and any optimism this morning is likely driven as much by action in other countries as it is by action here.
While the lifting of restrictions has so far been limited, the direction of travel is what’s most important at this stage. Markets are happy to look past dire figures on economic performance as long as they believe that activity can be brought back sooner or later.
A key question in the UK is how to get as much of the economy back up and running while keeping the rate of infection at manageable levels. We’re beginning to see grumbles that the Government’s messaging on staying at home has been too effective, with workers now unwilling to return to work with the virus still a very real threat. Many feel able to stay at home while their wages are being paid, including some who have been furloughed under the Government’s scheme to support 80% of wages up to £2,500 a month.
Today also brought reports that this support is to be extended to September, but with a lower proportion of wages supported. Reducing financial support for workers will be a politically difficult moment for the Government, but necessary if it wants to drive up economic activity - not to mention reducing the eye-watering cost of the scheme.
At the start of the crisis, there was optimistic talk of a V-shaped recovery, where activity bounces back quickly once the peak of the pandemic is passed. That has been replaced with a more realistic analysis and many now acknowledge that certain sectors simply won’t be able to return to anything like normal. Airlines and travel companies in particular have been hit by the news of new quarantine restrictions on many of those entering the UK, something that will dramatically discourage any international travel. Longer term changes like this mean a U-shaped increase in activity may now be the best we should hope for.
Imposing a lockdown in the first place was necessary due to the health implications of the pandemic. Lifting those restrictions will be harder to do and investors should expect further turbulence in markets as we slowly make our way back to normality.
Ensuring your investments can be held for the long-term, avoiding the need to sell at short notice, is key right now. That way, any more legs down for the market can be ridden out, and perhaps used as an opportunity to buy more at lower prices.
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