Preparing for lockdown 2.0

Get our take on how to prepare for trading lockdown 2.0. 

Parts of the UK headed into a second round of lockdown this week, with Scotland and Wales already dealing with circuit breaker lockdowns, a 6-week full lockdown for the Republic of Ireland and major cities like Manchester facing tier 3 restrictions. Other parts of Europe and the US are also facing coronavirus restrictions, so now is the time to make a plan for your trading if the western world enters lockdown 2.0. 

To make this easier for our clients, we have four ideas that should help to support your trading if we move into lockdown 2.0, which seems increasingly likely. 

1, Travel companies 

This is not the faint hearted, the airline industry has taken a battering this year, for obvious reasons. Rather than call the end of the tumultuous downturn for airlines and holiday firms, we would say that it is worth being reactionary whenever there is positive news. For example, the UK adjusted its quarantine rules for some foreign travel destinations on Thursday, including the popular Canary Islands. This led to a surge in IAG’s share price, which rose 4% on the back of the news.  TUI, the holiday company, was also up more than 6%, as investors rushed to price in a flurry of new bookings. While both of these companies are risky buy and holds, for those with longer time horizons they could be attractive at current valuations, especially if, as we believe, there will be a rush to book foreign holidays once we emerge from lockdown 2.0. If you prefer something that is already in a semi-up trend, then Delta Airlines in the US is worth looking at. It’s share price has nearly doubled in price since reaching its nadir in mid-May. Air travel within the US has faced less restrictions than Europe, which has also boosted Delta. Since we don’t expect any further restrictions for US air travel, there could be further upside for Delta in the months ahead. 

2, Technology shares: back in fashion, but no boom time 

The tech boom that dominated financial markets earlier in the year has fizzled out in recent weeks. A good example of this fall from grace is Amazon, its share price has dropped 400 points since reaching its peak in early September. One way to explain this decline is that as the world emerged from their first lockdowns in early summer, demand for Amazon goods, while still high, could tail off later this year as the people return to bricks and mortar shops and malls across the world. However, the recent spate of lockdowns, particularly in the UK and Ireland, could see Amazon and other tech titans roar back to life. However, do not expect the tech boom from earlier this year to be repeated even if we do move into lockdown 2.0. Firstly, there is a lot of good news still in the prices of some tech stocks, which continue to have high valuations. Secondly, the lockdowns in the UK and Ireland may not be followed on such a broad basis this time around. In Europe, lockdowns are more localised than they were in the spring, and the US seems to be avoiding lockdowns all together, for now. Instead, if you are a fan of tech, then it might be worth tracking the fortunes of future 5G providers. In the UK this includes BT and Vodafone, who will be the largest providers of the 5G network in the UK, however, it is also worth looking at Spirent Communications, who tests 5G connectivity. Spirent Communications is close to its highest level since 2001, but there could be further upside as the lives of UK citizens becomes more digitalised and 5G becomes the new norm in the coming years. 

3, Safe havens: gold  

Gold has also been shunned in recent weeks, even though it was a top performer for most of this year. Our view on gold is binary: if most of the world avoids strict further lockdowns then gold could struggle to make future gains. We believe that a victory for Joe Biden in the US Presidential election could also spell bad news for the gold price, as it would make a US fiscal stimulus package more likely, which would give room for the Federal Reserve to slow their pace of monetary easing, and it could kick start the US’s broad economic recovery. However, if the lockdowns in the UK and Ireland and in parts of France spread across the world then we expect gold to remain in demand. 

4, FTSE 100 vs. the Dax 

The FTSE 100 has lagged behind the German Dax index’s recovery so far this year.  After getting close to its pre-covid levels, the Dax has fallen back in recent weeks, and there could be further downside. On Thursday, German consumer confidence dipped more than expected, after the first localised lockdown was ordered for South Bavaria. Germany also recorded record virus rates earlier this week, and experts suggest that further lockdowns are likely. Thus, if this time around the UK acts before Europe, then we could see some upside for the FTSE 100 vs. its European counterparts like the Dax, particularly if other parts of Europe are criticised for taking action too late, which could lead to stricter restrictions for longer in the coming weeks and even more economic damage. A stronger FTSE vs. its European counterparts could be amplified if the UK and Europe manage to agree a trade deal by the end of this month.