19 Feb 2021 3 min read

Does lifting lockdown mean lifting markets?

By John Roe

Progress towards easing COVID-19 restrictions is good news for the economy and society. But it has different implications for different asset prices.



As James explained in his blog this week, policymakers must strike a difficult balance on the question of when lockdown measures can safely be removed. Vaccination rates in some parts of the world suggest a return to normality could occur as soon as next month, but new strains of the virus and further potential mutations weigh on the side of greater caution.

Governments in different countries will come to different conclusions, so let’s focus on three of the most important for us as investors.

The US

Our most debated topic is the reopening of the US. The Democrats’ stimulus plan is expected to be worth at least $1.3 trillion and is likely to come in March, at the same time as the remaining restrictions in large parts of the US begin to be lifted.

We think such a package could be excessive given that it is double the Congressional Budget Office’s estimate of the US output gap. By March, US household excess savings should be over 10% of GDP and could provide a war chest for both spending and further investment in the stock market by retail traders. This would occur just as uncertainty fades.

This combination of factors would represent an upside risk to growth, employment, and so ultimately longer-term inflation. The upside growth potential helps support our positive medium-term view on equities.

On inflation, though, we think it’s more complex. There have long been underlying deflationary forces at work in the US, such as technology and globalisation. America struggled to generate wage inflation even when unemployment was at a 50-year low of just 3.5% in 2019.

Structurally, we therefore expect inflation to disappoint in the medium term, but in the short term we know realised inflation is likely to be high – potentially 3% in May. That, combined with rapid rehiring post-lockdown, could temporarily help fuel the inflationary narrative that this time it’s different and sustained wage inflation is coming.

The UK

The UK is a vaccination trailblazer, with over 25% of the adult population having had their first jab. Despite that, we think UK sentiment remains quite negative due to the repeated lockdowns and Brexit-related news stories.

For example, UK rate expectations are still more dovish than other developed markets and we think sterling remains heavily undervalued. So, with the UK likely to be able to reopen some time in the spring, we want to position in UK rates for a strong rebound in growth ahead of unemployment’s probable peak around May.

The dynamics in UK equities are less clear, as a strong pound is a headwind given its impact on foreign earnings, so we remain tactically neutral.


Only about 5% of people in the EU have been vaccinated against COVID-19 so far, which we think means the bloc can’t reopen until at least May. Doing so earlier would be a mistake, in our view, particularly given the higher infection rates from new strains.

The chances of an economic boom in the EU are also lower, given smaller fiscal transfers and less inflationary risk, with five-year forward inflation pricing about half that in the US.

Against this backdrop, we’ve sold out of European cyclical equities and are also negative on euro investment-grade government bonds, where spreads are at their lowest since early 2018.

Equally, some ‘defensive’ European assets don’t look attractive either. 10-year bunds in particular have a yield similar to the ECB deposit rate and in our view offer limited return potential in risk-off scenarios, whereas in better scenarios they could sell off more materially.

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