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Markets are fickle beasts. The Prime Minister’s “roadmap” is a welcome addition to the saga of pandemic winners vs losers, and investors have reacted accordingly - this time hurting the former and bolstering the latter.
The lockdown winners - such as tech companies and online supermarkets - were those companies that thrived as societies and economies shut down.
The losers were the cyclically driven companies whose performance more closely resembles the health of the economy. Think of the airlines that have seen their fleets grounded for months on end, or the pubs whose casks were left to waste for much of last year.
Boris Johnson’s roadmap promises a reopening economy that stands to reverse that hierarchy. Investors know this, and are rushing to buy tickets to Boris’ brave old world.
Big risers across the FTSE 100 index of the UK’s largest companies include Rolls-Royce and British Airways owner, IAG, following an overnight surge in holiday bookings (Tui reported a 500% leap in bookings). Conference organiser Informa is the third highest riser at time of writing, with industrial manufacturer, Melrose, and property development companies, Land Securities Group and British Land, close behind.
The fallers are just as predictable. Scottish Mortgage, the Baillie Gifford investment trust with large holdings in companies like Tesla and Amazon, is number one, closely followed by the poster child for UK pandemic winners, Ocado.
It’s not only the different sectors that are playing to script. We’d expect a reopening economy to favour small companies over large. That’s because big companies include many pandemic beneficiaries like tech stocks, while smaller companies are more reliant on their domestic economy.
That’s been borne out in the performance of the UK’s major stock indices after the roadmap announcement. The FTSE 250 index comprises the UK’s 250 largest companies after the FTSE 100 (i.e. numbers 101-350). The former rose, albeit modestly, in the morning following the announcement, while the FTSE 100 fell (though this was due in part to a strengthening pound, which confusingly hurts the UK’s largest companies because of their international focus).
All this was entirely predictable. Since markets hit their April nadirs last year, there have been several occasions when bouts of (usually vaccine-driven) optimism have prompted the same market reaction.
The big turning point was November 9, when Pfizer first announced its vaccine. The highest risers then were Rolls-Royce, IAG and Informa, just as they were now after the roadmap announcement. Since then, smaller UK companies have comfortably outperformed larger ones.
But whereas November’s news was a genuine gamechanger that breathed new life into the world’s most beleaguered sectors, yesterday’s roadmap doesn’t have the same shock factor. We knew that a path out of lockdown was coming, with various leaks providing clues. Yet many investors still chose to wait until the bandwagon had started moving before they jumped aboard.
It serves as something of a reminder that maintaining a long-term vision over your investments beats knee-jerk reactions. Monday’s news is certainly welcome, but it doesn’t suddenly negate the value of tech companies or online retailers we’ve grown accustomed to over the last 11 months, just as the pandemic hasn’t permanently changed society as much as we thought it might back in April. Keeping a well-diversified portfolio of investments, which captures elements of both stories, is more likely to deliver sustainable returns in the long run.
Leaping to the sound of good news also risks getting carried away. The Office for National Statistics (ONS) reported this week that the UK jobless rate is at its highest level in five years, with younger workers bearing the brunt. Unemployment rose to 5.1% in the three months to December, and economists fear that figure could get significantly worse before the end of the year.
Many leisure and hospitality companies meanwhile have been left despairing that the roadmap is too slow, and that their earliest opportunity to reopen misses the vital Easter holidays.
So, while Monday’s roadmap is good news, we’re far from out of the woods. The disconnect between markets and the real economy may become even more glaring, and there will be further bumps on the road back to normal and beyond - the rising spectre of inflation looks the most ominous. As ever, it remains best to keep your gaze set firmly on your long-term goals, and to block out the noise in the meantime.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.