22 Oct 2020 2 min read

Wave erosion: lockdown risk could wear down investor sentiment

By Emiel van den Heiligenberg

Governments around the world are gradually re-imposing economic restrictions in response to new waves of COVID-19, but investors’ attention seems to be focused elsewhere.



Until recently, improvements in the treatment of COVID-19, increases in ICU capacity, and a decoupling between death and infection rates – compared with the initial stages of the pandemic – provided us with confidence that severe future lockdowns were unlikely.

However, we have now become more concerned about the possibility of a second widespread shutdown in the western world. The past week has brought confirmation of stricter restrictions in parts of the UK, Ireland, Belgium, and France to name just a few places. The case load is increasing in the US as well; although the country did not reopen schools to the same extent as in Europe, we believe there will be increased pressure for lockdowns there too.

Conscious of the economic costs of such measures, policymakers have been torn between trying to control COVID-19 and trying to mitigate the economic damage. These are interlinked, of course: tolerating the spread of the virus is more likely to depress than revive economic activity. There are no easy answers.

In our own research, we are looking at the role of schools in spreading the virus, the impact of colder temperatures (which mean, as a minimum, more activity indoors), and the degree of restrictions required to contain the increasing pressure COVID-19 could place on hospital ICUs. The one area of comfort is that the experience of the southern hemisphere suggests the existing measures will likely make this an exceptionally mild flu season. However, the scientists continue to recommend early action to contain the spread and no politician wants to risk pictures of patients on trolleys in hospital corridors if current trends were to persist.

Stay alert

Yet this lockdown risk is underestimated in consensus opinion at the moment, in our view. Investor surveys show that people are preoccupied with the US election and the associated matter of Congress agreeing a fiscal deal; the virus plays second or even third fiddle at the moment.

This seems too complacent to us. We now know the magnitude of the economic hit from lockdowns – even smaller-scale restrictions can devastate sectors like hospitality – and it is far from certain that they will be accompanied by the level of policy support that steadied financial markets in March.

We are therefore becoming slightly more cautious on market risk. We have kept our equity weight unchanged but we are putting in place some protection like hedging the South Korean won.

However, for the medium term we remain inclined to “buy the dip” in equities in anticipation of an early-cycle economy and our conviction around the availability of a vaccine in 2021.

I also discuss this topic in this short video.

Emiel van den Heiligenberg

Head of Asset Allocation

Emiel is responsible for the overall strategic direction of the team’s investment and business strategy. He claims to have been a promising lightweight rower at university until French fries got the better of him. Reflecting his love for rowing in a team, he firmly believes that excellence can only be achieved by a great team made up of motivated individuals that are also eager to work together. To this end he is the self-proclaimed inventor of the verb 'teaming' to acknowledge that shaping a top team and culture of excellence is an ongoing process. Outside of work-family obligations, Emiel’s spare time is filled by a passion for shark diving and skiing. Prior to dedicating his career to portfolio management in 1996, Emiel worked as a policy adviser in the Dutch Ministry of Finance and he graduated from Tilburg University in the Netherlands ages ago. When not glued to his Bloomberg screens, this Dutch man is hooked on computer games, peanut butter and his favourite dark beer made by Belgian monks.

Emiel van den Heiligenberg