What Europe’s fourth wave of Covid means for investors

Just when it looked as though the lockdown rollercoaster of the last 18 months might finally be over, Covid infection numbers are spiking higher across Europe, raising fears that we could be on course for another painful period of prolonged uncertainty.

Last week, Austria became the first country in Europe to announce another national lockdown. And last weekend, mass protests against restrictions took place not only in Austria, but in many other European countries too.

The tougher response comes as Hans Kluge, the World Health Organisation’s regional director, told the BBC that Europe could see another half million deaths by next spring in the absence of tougher restrictions.

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We’ll leave the medical analysis to the scientists for now. But are tougher lockdowns – and the knock-on effects on the economy – something that investors have to worry about?

Mainland Europe is introducing restrictions again

Belgium, which has fully vaccinated almost 75% of its population – even higher than the UK’s rate of over 69% – recently reintroduced restrictions as cases ripple across the country. The government extended work from home rules and imposed more stringent laws on those who aren’t vaccinated.

This is similar to Austria, where the government introduced a national lockdown just days after it introduced a “lockdown for the unvaccinated”, and became the first country in Europe to make vaccinations mandatory with a law due to come into force in February next year.

Germany, meanwhile, is seeing a spike in intensive care units being filled up, with the country experiencing one of the sharpest rises in cases since the start of November. Unvaccinated people in Greece cannot enter any public indoor spaces, including restaurants and gyms.

In the UK, the situation is less dire and – fingers crossed – further lockdowns seem to be off the cards. But, clearly, the wider concern for the global economy is that the more we see parts of the globe shut down, the more pressure there is on the supply chain and inflation, and the worse the current problems may become.

Market watchers are worried Germany will follow suit

Investors are most concerned about whether Germany, Europe’s largest economy, will follow suit and also introduce drastic Covid restrictions, says Carl B Weinberg, chief economist at High Frequency Economics. “If Germany locks down, Europe is going to go back into recession,” he told the New York Times.

“Germany contributes 29.6% to eurozone GDP, almost ten times Austria’s 3.3%. One lesson from the pandemic is that harsh measures cannot be ruled out,” says Holger Schmieding, chief economist at German bank Berenberg, in The Telegraph.

As the New York Times puts it, the weeks leading up to Christmas are some of the most important shopping dates in Germany and Austria with outdoor markets providing a significant chunk of revenue during the festive period. So the spectre of another national lockdown in Germany would almost certainly hit growth.

Another question is what happens to inflation and generous stimulus packages if Covid does remain out of control in both Germany and wider Europe?

Eurozone annual inflation hit 4.1% in October, higher than expected. There was already a fear that supply bottlenecks and rising energy prices would cause higher prices and require more central bank intervention, such as extending support and forcing central banks to print even more money.

Yet while economists and experts are sounding the alarm on the continent, the rest of the world “was unfazed”, says Bloomberg. Why?

Partly because we’ve been here already. When the Delta variant prompted a third wave in Europe in summer, markets were unfazed mainly because hospitalisations and deaths remained low. And as Rupert Thompson, chief investment officer at Kingswood, puts it: “Any… drag should be much smaller than that seen last winter”. This is mainly because Pfizer’s new Covid-19 pill “cuts hospitalisations dramatically in early stage infected higher-risk patients and should be widely available from the spring”.

“While the latest Covid-related headlines create some near-term uncertainty, they are unlikely to signal a meaningful change to the economic or earnings outlook,” agree Morgan Stanley analysts, according to Bloomberg.

So what should you buy?

Goldman Sachs says that buying cyclical stocks in reaction to any concern about shutdowns is the best move. “While virus counts are now rising and weighing on reopening stocks, as the winter wave passes, declining virus and inflation headwinds should provide a near-term boost to corporate revenues and margins for the businesses most exposed to these challenges.”

The oil and gas sector is a good example. Oil demand collapsed when economic activity was hit hard last year, with global crude prices hitting multi-year lows. US crude prices even briefly turned negative. But both European and US benchmarks are trading higher than pre-pandemic levels and a surge in gas prices means demand for gas and oil companies is only rising.

You can look at individual oil and gas stocks, but as we’ve mentioned several times in the past, one of the easiest ways for UK investors to tap into the market is to invest in the iShares Oil & Gas Exploration & Production UCITS ETF (LSE: SPOG).