While markets are reacting to a potentially devastating second wave of COVID-19 infections, it’s important to put things in perspective.
COVID-19 is making something of a comeback, with a number of US states reporting rising numbers of new cases and a headline-grabbing outbreak at a Beijing market. But with markets seeing heavy pullbacks over the last few days as bad memories of mid-March resurface, it’s important to remember that a second wave won’t be the end of the world.
“A serious second wave of coronavirus cases in major developed countries is the biggest risk facing equity markets, and one investors will need to watch closely,” said Dr Shane Oliver, AMP chief economist. “However, provided any second wave is relatively mild in terms of pressure on health systems and the number of deaths, it’s unlikely to reap the havoc seen back in March.”
The US has learned to better manage new cases to minimise hospitalisation and deaths, while more than a hundred vaccines are currently being trialled around the world. And while several areas of Beijing have been locked down – and the potential for its outbreak to escalate into something more serious – it’s likely that the outbreak will be brought under control.
“The risk should be able to be minimised with lots of testing, tracking and quarantining,” Dr Oliver said. “As such, our base case remains that the pullback in shares over the last week is part of a correction in a broader rising trend.
“Quarantine fatigue” is likely to prevent new lockdowns being instituted, with most governments choosing to use a targeted approach, while extraordinary stimulus is helping buoy market sentiment through the worst of the crisis.
“After major bear market lows associated with recessions [it’s] common for shares to surge higher, get very overbought, and then see a pullback on concerns about a ‘[double-dip]” back into recession.
“The pullback then sees shares shake off some excesses which then allows the rising trend to resume.”