Freedom day, marked on the calendar as the day life could return to some normality, has not been the big celebration that the UK had anticipated.
During the first half of trading on 19 July, the FTSE 100 fell more than 2% and the pound hit a three-month low against the dollar as investors remained concerned about rapidly increasing case numbers.
“Lots of people have been vaccinated and assumed they had become invincible. Reality is now striking as many of these individuals get a wake-up call by catching Covid or being pinged and told to isolate,” says Russ Mould, investment director at AJ Bell.
“There is no ticker tape parade, cheers from the rooftops or people dancing in the streets as Freedom Day finally comes. The UK stock market is certainly not in a celebrating mood.”
See also: Freedom Day sends UK market into a tailspin
Heartache for hospitality and travel continues
At the end of last week health secretary Sajid Javid tested positive for Covid-19 and members of senior government were ‘pinged’ by the app. This prompted the latest U-turn by prime minister Boris Johnson and chancellor Rishi Sunak who initially claimed they were not heading into self-isolation but instead taking part in a daily testing pilot.
An estimated 1.7 million people in the UK are currently self-isolating having been contacted by NHS Track and Trace, with inevitable disruptions to businesses across the country. High street supermarket chain Iceland and pub group Greene King have both said their businesses have been significantly affected, with large numbers of staff unable to work.
“From retail to manufacturing and hospitality, the warnings are coming thick and fast that mandatory isolation is leading to reduced business operating hours, a drag on sales and a reduction of output,” says Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
The hospitality sector has not fared well during the pandemic. According to data from the Office for National Statistics, consumer spending on hospitality remains at less than 70% of pre-pandemic levels.
Travel has also had a tough 18 months, with major airlines still battling restrictions and frequent alterations to the rules put in place by governments around the world.
“The confusion surrounding quarantine and testing rules for international travel is leading to fresh uncertainty about the prospects for the aviation and tourism industries, which have been struggling through the worst crisis in their history,” adds Streeter.
“The lack of warning about the need for travellers from France to isolate for 10 days from today, has thrown holiday plans into fresh mass chaos, with hopes of a boost to summer bookings evaporating.”
Mould agrees that the struggles for the travel and tourism industry will continue. International Airline Group, owner of British Airways, was down 5.5% on Monday, while holiday operator TUI was down 4.4%.
“Many of the stocks leading the UK stock market downwards are related to travel and leisure, suggesting that investors are extremely worried that we’ve lifted restrictions too soon and that another lockdown could be a month or two round the corner,” he says.
“Pictures from UK airports would suggest some increase in flying but certainly nowhere near the levels one might have expected a few months ago. Then, everyone was talking about their big plans to celebrate once Freedom Day came around, and now it’s proved to be a damp squib.”
Inflation troubles
Global economies have been slowly opening over the past few months in line with Covid vaccination programmes that have already seen 1.01 billion people in the world fully vaccinated and 2.05 billion having received their first dose.
In the UK, the recent inflation spike has further compounded investor fears and all eyes are now on the Bank of England.
“From now on, more attention will be paid to macroeconomic data points, particularly inflation, and whether central banks are forced to tighten policies to prevent overheating,” says Vincent Ropers, co-manager of the TB Wise Multi Asset Growth fund.
“While they are likely to remain accommodative for as long as possible, central bankers are walking a tightrope and any tweak to commitments of support will be scrutinised and create volatility.”
Buying opportunity
However, there are positives to be had and for James Burns (pictured), co-manager of Smith & Williamson Investment Management’s MPS, UK equities could be a great opportunity for investors.
“The UK remains one of the cheapest equity markets in the world and there is a lot of positive news around M&A, with bids for UK companies seemingly coming on a weekly basis. With interest rates at rock-bottom levels, and the UK equity market offering so many opportunities, M&A is not going to go away anytime soon,” he says.
“Lots of the activity we are seeing is in the mid-cap space and we own a lot of actively managed funds, including Artemis UK Select and Man GLG Undervalued Assets, which invest here and could benefit.”
Ropers agrees, adding that the UK is trading at a discount relative to other developed markets.
“The easy gains for financial markets, which started when the path for a global economic recovery became clear in Q4 last year, are likely behind us. This does not mean it is all downhill from here though, and there are many assets where attractive valuations can now act as a catalyst for further upside,” he says.
“We have been early to this story, which we view as attractive due to compelling underlying value, the potential for economic recovery and broadly underweight positioning from global investors. We were also attracted by the potential to pick up discounts via investment trusts.”
