It all feels too familiar now, with many assuming the worst. With a surge in coronavirus cases over the last few weeks, the British Government has started to phase in new restrictions and has hinted that a second lockdown is very probable – we could be heading for a double dip recession. The first U.K. lockdown was problematic to say the least, with all aspects of life being affected. The markets took a huge hit, people were made unemployed, businesses struggled to stay afloat, and the health effects have been devastating (and even fatal) for many. In this article, we will be looking at just a few of the various problems a second lockdown could bring about, along with some potential investment opportunities.
Market sentiment is a primary indicator of how things are likely to go, and we can already see sentiment wavering at this point. The anticipated second lockdown has not come into force yet, but just from the joint press conference with Chris Whitty and Patrick Vallance on Monday morning, the mere prospect of it is clearly beginning to disrupt the markets.
Index funds, a collection of stocks/bonds that tracks a market index, are already showing that a second lockdown will drive down share prices again. The FTSE 100 (the biggest 100 firms in the U.K. on market capitalisation – see here) is a primary example of wavering sentiment. On Monday evening, the index closed at 5,804, a 3.4 per cent decrease from its same-day opening point, which is its worst performance since mid-May.
FTSE 100 performance over the last year (Bloomberg)
The FTSE 100 is a key indicator of the U.K. economy and crashes such as that in March have the potential to heavily impact a whole range of investments, including pensions for example. The graph above shows just how badly companies across the index have been affected by the virus and the subsequent lockdown. Falling over 2500 basis points between February and March, and with growth levelling off and lacking any real momentum over the last few months, the impacts of the first lockdown speak for themselves. Given the new lows of the FTSE, it is highly likely that, should a new lockdown be implemented, we could see a further slump of the index as the companies within it start to feel the effects.
While for some this may be a real concern, at the same time, others may see this as a potential opportunity for investment. Having not hovered around the 6000-basis point mark since 2016, should the price drive even lower, in terms of long-term investing, it may be a good price to buy in. And, given that CEBR expects that a second lockdown will not knock consumer and business confidence in an economic recovery, it may be that we see some faith restored in the index. However, it will be necessary to thoroughly evaluate this option before jumping into anything.
While index funds portray a reliable overall picture of companies, delving deeper into the nitty-gritty of individual businesses and industries really underlines the potential fall-out of this second lockdown. The aviation and hospitality industries, along with many others that rely on physical customer presence, are those who suffered the most during the first lockdown, and undoubtedly are likely to suffer again.
Airlines have been decimated by the pandemic. Share prices for numerous aviation companies, as shown below, fell dramatically, and they are bleeding cash; Flybe even fell into administration due to the initial bans on international travel.
The following graphs depict share price progression of Easy Jet, IAG and Ryan Air (Bloomberg)
Looking more in-depth at the FTSE 100, it was IAG (owner of British Airways) who took the biggest hit on Monday with a twelve per cent drop in share price. Similarly, in the Europe Stoxx 600 Index, which was down 2.8 per cent, it was the airlines driving this loss. The fact that index funds are already being driven down by dipping airline stock prices really does not set a good tone for the aviation industry, should a second lockdown be imposed.
Despite many flights continuing to operate over the last few months, and thousands of Brits making the most of limited opportunities to travel overseas, flight sales are no way near the levels of previous years. Social distancing measures have restricted the maximisation of sales, and the wavering (and distressing) prospect of a two-week quarantine has certainly put people off going abroad this summer - many even cancelled their plans altogether. Therefore, airlines are already in a very weak position, and a complete halt in sales will be detrimental to the airlines in the long-term. Additionally, destination countries such as Spain, which relies so heavily on the tourist sector for 2.9 million jobs and €178bn of annual GDP, will also be impacted by another U.K. lockdown.
Nevertheless, we often hear of ‘buying the dip’, so once again, this may be a time to consider investing in companies while the price is low. Looking at the graphs above and comparing current share prices to those in March, you can clearly see that the dip provides an opportunity to see a good return on investment (ROI). While overseas travel will most likely be completely written off over the next few months, a vaccine may well be around the corner - should you think a rebound is possible for well-established airlines, it may be a good time to hop on. However, as always, before investing your own money, it is incredibly important to carry out your own extensive research on a company first – The Student Investor is not liable for any investment decision made by our readers!
Restaurants and pubs are pivotal to the U.K. economy. The industry is worth almost £40bn and provides over 900,000 jobs nationwide. Whether it be a local diner or a franchise of restaurants, with no one to serve, cash and staff will certainly start to disappear at a fast rate under another lockdown. Over 22,000 hospitality workers have already lost their jobs this year, sales were wiped out between April and June, and thousands were unable to reopen their doors. However, the aftermath of a second lockdown could be even worse.
Restaurants and pubs will not have the luxury of warm weather and summer holidays to attract customers, nor will they be able to profit from the use of extensive outdoor seating to adhere to social distancing guidelines. Dark winter months are just around the corner, so, will people really want to be sitting inside surrounded by others post-lockdown? And, more importantly, will restaurants and pubs be able to accommodate customers safely?
Chart covering the number of discounted meals sold in August (Guardian, HM Treasury)
Furthermore, Rishi Sunak’s Keynesian Eat Out to Help Out scheme bolstered the restaurant industry, and it was without a doubt a needed lifeline. Eat Out to Help Out saw 100 million discounted meals purchased in August alone and brought about a 216 per cent table booking increase on the August bank holiday weekend compared to 2019. However, costing over £500m, will the government really decide to reinitiate the scheme? If not, the lack of incentive to get back out and spend money will certainly be at the detriment of U.K. eateries.
By no means are these the only two industries that would be negatively affected. Construction, retail, leisure, and cinema, just to name a few, will certainly bear the brunt of a second lockdown. Already impeded by social distancing restrictions and unable to operate at full capacity, the recovery of these already-weakened businesses will depend entirely on the length of the lockdown. To see the exact impacts of coronavirus and lockdown on the cinema industry, be sure to check out David Dwek’s article for The Student Investor here.
A Flip Side?
Despite industries and business struggling, and even toppling, exceptions to this trend are online businesses and tech companies. These sectors have remained largely unaffected by the coronavirus and lockdown. And, a second lockdown may even see tech companies along with online retailers be propelled to new levels on the market, thus presenting potential investment opportunities.
We need to learn to live with the coronavirus, and our lives have certainly shifted; we are doing more and more things online, particularly socialising and working from home – this is highlighted by the tech companies still looking strong. Laptop sales spiked between March and June and tech stocks performed rather impressively over the last few months, with the likes of Zoom, Facebook, and Apple benefiting from a low production cost-high revenue strategy. With life continually transitioning to online activities, those who initially decided to make do with technology they already had, may decide to invest in the work-from-home lifestyle. Assessing such tech sales patterns, along with a company’s long-term outlook on the virus, may reveal potential opportunities in the market to invest in.
Online retail and food shopping might also be areas to consider looking into given their strong performances over the first lockdown. Ocado stock experienced a huge rally, trading at £1,077 on March 12, then soaring all the way past the £2000 per-share mark by June. A second lockdown will only heighten people’s reliance on food delivery services such as Ocado, so, this sector may well be worth watching. Similarly, online retailers will be playing a big role this winter as the Christmas season approaches; stocks such as Amazon and The Hut Group, who recently went public (see my previous article here), could also be alternative investment options to research.
Having already experienced a full-scale lockdown, we know the devastating impacts it can have on a nation – on the population, on businesses of all kinds, and the economy as a whole. However, with winter coming and companies still dealing with the impacts of the first lockdown, will businesses be able to survive a second drought of sales? Last night, Boris Johnson introduced new measures to reduce the transmission of the virus, and the success of his restrictions will certainly determine whether the U.K. is on course for another nation-wide lockdown.
Do you think another lockdown is manageable? Or, do restrictions need to get tighter now in order to combat this possibility? Let us know in the comments!
The Student Investor is not a registered investment, legal or tax advisor or broker/dealer. All opinions expressed by The Student Investor are from the personal research of the author, and are written for educational purposes only. Although best efforts are made to ensure that all information is accurate and up-to-date, occasionally unintended errors and misprints may occur. Please note that the value of your investment can go up or down, and The Student Investor takes no responsibility for any decisions made by readers.