The UK’s New National Lockdown

As if the world weren’t already on course for the saddest Halloween in recent memory, UK Prime Minister Boris Johnson announced on Saturday that England will enter a four-week lockdown on 5 November. It is presently scheduled to end 2 December, but Johnson warned Monday it could extend well into 2021 if conditions warrant. The aim is, in our opinion, noble—slowing COVID’s spread. But from the standpoint of near-term UK economic growth and the many impacted businesses and households, this is obviously not good news. Based on our reading of financial news globally, it is already leading many commentators to warn of trouble for UK equity markets. However, for investors seeking long-term growth, we see a few things that are worth keeping in mind for both the UK and other places adopting more stringent restrictions.

The first important consideration, in our view: This full lockdown isn’t quite as strict as measures adopted in March. Yes, non-essential businesses (e.g., stores, hair salons and other personal services) must close, restaurants can serve takeout only, households can’t mix and people must limit travel to essential activities. But schools remain open—unlike in the spring. Factories remain open as well—another difference. Fiscal assistance is already in place via the return of the Treasury’s furlough scheme, which provides compensation for people who can’t work due to forced business closures. We aren’t going to call this “lockdown lite” or argue it is some whopping positive. But our research indicates it is a mite better than the worst-case scenario discussed amongst financial commentators for months, where everything closes and the government has no help in place.

Second, Saturday’s announcement wasn’t a surprise. We guess the fact UK markets rose on Monday is one piece of anecdotal evidence supporting this, although we are loath to read into one day’s market movement.^[i] More compelling, in our view, is the timeline of UK COVID chatter over the past three months. As Exhibit 1 shows, the discussion flipped from reopening to potential new closures back in early September, and rumours of full lockdown have floated throughout financial news for about a month. France and Germany’s decisions to adopt nationwide measures last Wednesday further heightened UK lockdown chatter in the outlets we follow regularly. With the timeline laid over the MSCI UK Investible Market Index (IMI)since the end of August, we think the extent to which UK shares have been grappling with a potential new lockdown becomes clear.

Exhibit 1: Three Months of UK Lockdown Chatter and Market Movement

Source: FactSet and BBC News, as of 2/11/2020. MSCI World UK Investible Market Index total return, 31/8/2020 – 2/11/2020.

Our research indicates COVID policy doesn’t have a material impact on returns in the UK versus other countries, so we don’t think investors benefit from basing portfolio positioning on these developments. The main takeaway, in our view, is that whilst more volatility is possible, we don’t think a more lasting, deep decline (a bear market) is likely to be underway now.