Yesterday was Freedom Day in the United Kingdom, the day when the British Government abandoned the last coronary restrictions. Boris Johnson’s victory speech was ready, but the conditions are far from festive due to the Delta variant. Even the stock market is struggling.
New British divide
Thanks to the Delta variant, the number of coronas in the UK rose in recent weeks almost to the January peak. Scientists are coming up with doomsday scenarios; it is feared that soon the care personnel will not be able to cope with the new influx. They even fear a further worldwide spread of the contagious Delta variant of the virus and the emergence of new variants that are resistant to the available vaccines. Half of Britons think that the measures should remain in place for the time being, while the other half want to abolish all measures. Just as during the Brexit, the British are diametrically opposed to each other. This division is reinforced by the fact that the group of people who continue to follow the measures can be recognised by their mouth guards in shops and buses. They make the other group out to be anti-social and sociopathic.
Freedom Day correction
On Freedom Day, news of the rising contagion caused the worst trading day on European exchanges so far this year. Now, it is the case with every correction that there are several causes that play a role to a greater or lesser extent, but that we are all too keen to point to one main cause, and in this respect, the Delta variant is of course ideal. In itself, it is strange to point to the virus, because we have seen that after a rapid correction of 35% last year, financial markets did not care about any virus at all. Stock exchanges rose thanks to exuberant monetary policy and fiscal stimulus. Those measures were taken because of the virus; in that respect, the virus has been good for the markets.
A monetary and economic stimulus is waning
Since November, the news about the vaccinations has caused economic growth expectations to be constantly revised upwards. But those two important impulses in terms of liquidity and economic growth are now falling away. Rising inflation and strong economic growth will not cause central bankers to ease further, and with the economy fully opened up, growth expectations will no longer be revised upwards either. Instead, growth is being held back by longer delivery times, insufficient inventories, and a shortage of staff. Financial markets rise on such impulses, which are usually the second derivative. Less is simply not good enough. Now that these impulses are disappearing in the middle of the cycle, the market is searching. Focus on quality.
Lower valuation and a breather
It is certainly not down to factors such as valuation or sentiment. The valuation of equities is falling rapidly due to sharply rising profits and falling interest rates. The fall in interest rates in particular is providing much more air for higher valuations. For example, in just over three months, the 10-year interest rate in the United States has fallen from 1.75% to 1.18%. At 1.75 percent, an S&P-500 index reading of 4500 fits, at 1.18 percent an index of almost 7000 according to the Dividend Discount Model, a difference of more than 50 percent. The sentiment was more optimistic almost the entire first half of the year than it is now. No, this feels like a bull market correction, a breather, a moment to let off steam. Typically, a correction of less than 10 percent. Anyone who wants to take advantage of this has to time it right twice, incur costs twice, and risk missing out on part of the further upward movement. Yet more money is lost in timing such corrections than in the actual correction itself.
Delta variant, the risk becomes an opportunity
With real risks, you always get bitten by a snake you can’t see. The first outbreak of the coronavirus came as a complete surprise. We were not prepared and hardly knew what to do. Now, every headline is full of stories about the Delta variant – that is when the risk became an opportunity. In the United States and the United Kingdom, almost half the population has now been vaccinated. In continental Europe, it is just under 40%, but another 20% have received one vaccination and the pace is good. At present, about 1% of the European population is vaccinated every day. This means that in September, continental Europe will break through the critical threshold of 70% vaccinated. By the end of this year, the total number of vaccines available will be enough to vaccinate 6.8 billion people out of a world population of 7.9 billion. The Delta variant is 60 percent more contagious and also makes more people who have not been vaccinated sick. The good news is that for the fully vaccinated, the risks are very small. Pfizer’s vaccine is 80 percent effective, AstraZeneca’s 60 percent. Much more importantly, both vaccines provide 96 percent and 92 percent protection against serious illness or death. To date, no one under the age of 50 has died from the Delta variant of the virus in the UK. Death rates there have fallen to 10 percent of the first wave.
Lockdowns are overtaken by vaccines
Yet there are still areas where many people refuse vaccinations. In the United States, there are 20 states where less than 50 percent of the population has been vaccinated, despite the presence of ample vaccines. There is little popular support for a new lockdown, certainly not to protect people who do not want to be vaccinated. What matters is that the hospitals can cope, and for the most part they do. In Asia, however, there are new lockdowns. In South Korea, half of the population is in complete lockdown. Additional measures are also being taken in India and Indonesia. The good news is that in China, 70 to 80% of the population will have been vaccinated by the end of the year. In India, 46% of the population over 45 years of age have already been vaccinated with at least one dose. Remember that by the end of this year, there will be enough vaccines for 86% of the world’s population. We are not going to see an outbreak like last year. At least we will not be surprised by it. Moreover, stock markets have shown that they can perform well in such an environment. Perhaps that is the real risk of the global economy opening up completely, the fear that support measures will also disappear. If so, investors can rest assured that as far as liquidity, the economy, and valuations are concerned, all signs are still green.