Are Rising Covid-19 Cases About to Crash Stock Markets Again?

Investors are right to ignore rising coronavirus cases at the moment, according to experts

Investors should look past the alarming number of new coronavirus cases in America and stay invested in the stock market, fund managers are advising.

While they concede there is a risk of another stock market crash, the most likely outcome is that markets will continue to tick higher because of stimulus from central banks, generous government spending packages, and unwillingness across the globe to lock down as thoroughly as in March to order to avoid further economic damage.

This is despite Covid-19 cases passing 10 million and deaths passing 500,000, as well as new daily records for cases in America.

Shamik Dhar, of BNY Mellon Investment Management, said the most likely outcome, at a 50pc probability, is that there is no second wave and instead there is V or U-shaped economic recovery, which suggests a strong bounce back.

“In this scenario we have seen the low point in global economic activity and the most extreme lockdowns. Economies continue to reopen, health care systems are able to manage any new outbreaks and a second round of lockdowns is prevented,” he said.

However, he added that while investors expect markets to continue to rise, there remains a lot of uncertainty.

“Our overall attitude is therefore cautiously positive towards stocks, but expect judicious stock selection to be key,” he said.

Mr Dhar puts a 30pc probability on rising cases leading to partial or full lockdowns in the northern hemisphere and then a fall in economic activity and stock markets.

The worst outcome, at a 15pc likelihood, is where major economies see a sizable second wave which creates a permanent economic impact.

Iain Barnes, of wealth manager Netwealth, said central bank measures to support stock markets have led to a positive longer-term outlook for stocks.

Nevertheless, there will be considerable volatility along the way, particularly in the coming months as cases rise and markets digest the news, he noted.

He said investors should watch American stock markets closely for signs that consumers are less willing to spend, which may see American stocks perform worse than other regions.

The November presidential election adds a further complication, according to Mr Barnes, as the virus could lead to some less market-friendly policies from resurgent Democrats.  He recommends investors stagger any fund or stock purchases to help iron out any volatility.

Graham Bishop, of investment manager Heartwood Investment Management, said governments may be less willing to implement full lockdowns in the future in order to limit economic pain.

He has been replacing some stock and government bonds with strategies that offer better risk/reward payoffs, such as convertible bond funds, which have characteristics of both stocks and bonds, as well as funds that profit when volatility goes up.

The Telegraph

Sam Benstead