14 Jul 2021 3 min read

Delta Force

By John Roe

We explore the market implications of the spread of the delta variant of COVID-19.



“Chuck Norris doesn’t wear a watch; he decides what time it is.” Chuck played the lead character in 1986 cult classic film The Delta Force; his power was so legendary, it has spawned a whole genre of memes on the theme. We’re hoping the delta variant of COVID-19 will be more easily tamed, but it is an emerging risk.

The underlying problems are twofold. First, the delta variant appears to be significantly more infectious, with the disease spreading at least twice as fast as the original virus strain. The types of social-distancing measures needed to control it would therefore be much more severe.

The hope is that vaccinations will stop the disease from spreading even further, but that brings us to the second problem: data suggest that vaccines are somewhat less effective against the delta variant.

A global challenge

So, what does that mean for different countries? Well, there are three main issues that concern us.

First, for countries with low current vaccination rates, an eradication strategy is harder to achieve and so there’s a greater chance of lockdowns and associated economic slowdowns. For example, Australia, New Zealand and Japan have less than 20% of their populations fully vaccinated. Just last week, Japan announced spectators will be largely barred from the Olympics, while half of Australia’s population is now in lockdown.

Second, for countries that are reopening, cases could pick up fast. Even with high vaccination rates, hospital capacity could be tested. The UK is a guinea pig here, of course, as the government plans to end social-distancing restrictions in mid-July. Our base case is now that UK infections increase rapidly through early August, and could surge to levels that are a multiple of previously recorded daily cases. The good news is that full vaccination is estimated to reduce hospitalisation risk by 90% or more, but there could still be strain on the NHS with such high infection levels and also associated ‘long COVID’ cases.

Finally, there’s a wider question on vaccine efficacy. For example, in Chile – where one of the vaccines developed in China has been used extensively – deaths are surprisingly high, which is a worrying sign. That said, looking at hospital data, it is predominantly people below 50 who are ending up in ICU, which seems to imply the surge is being driven by less vaccinated, younger age groups. That in turn is supportive of the vaccine’s effectiveness. We’re focusing more on this aspect, as there would be severe macro risks if the more infectious strain and lower vaccine efficacy combined to cause wider lockdowns and disruptions, in China in particular.

Given the range of different risks outlined, investors who are concerned about them will likely need to implement a range of different positions to avoid placing too much weight on any one of these risks materialising. For example, government bond positions across the range of countries highlighted above could be one such solution for those with sufficient flexibility to do so.

John Roe

Head of Multi-Asset Funds

With failed football dreams behind him, John applies the same level of enthusiasm to investing and how to improve outcomes by battling behavioural biases. He leads on oil research, but also gets involved in a wide range of macro topics. That love of variety also explains his craft beer fascination. Hard to shut up, he’s a regular guest on Bloomberg, a conference speaker and an LGIM Director. His analytical thinking benefits from being an Actuary with an economics degree and having previously worked as a strategist at RBS.

John Roe