Covid-19: From pandemic to endemic

Two years into the global pandemic, Covid-19 is still with us, but the economic impact is receding. The Omicron variant, which hit in late 2021, has now become the dominant strain globally. Despite fears it might be more contagious and resistant to vaccines, early evidence suggests that, while highly transmissible, the symptoms caused by Omicron are less severe than previous variants. In the UK, soaring infection rates are now easing, while the rapid booster rollout and better treatments mean death rates and hospitalisations have been lower than expected.

It’s important to note that we’ve come a long way since the emergence of Covid-19 in early 2020. Governments and businesses have become more adept in managing the pandemic and handling outbreaks, while vaccines have provided much-needed protection from disease and death for millions of people around the world. The introduction of oral anti-viral pills should provide another line of defence against the virus, and potentially hold the key to ending the cycle of periodic lockdowns.

Covid-19: From pandemic to endemic

Figure 1: The Covid-19 Stringency index across the world.

The stringency index is a composite measure based on nine response indicators including school closures, workplace closures, and travel bans, rescaled to a value from 0 to 100 (100 = strictest).

As 2022 progresses, accelerated vaccination rates and acquired immunity should reduce the need for drastic measures to control the virus such as lockdowns. However, while the vaccine rollout has been a huge success, the potential for new variants to emerge continues to pose a risk for global economic activity. Vaccine inequality between the developed and the developing world is a key contributor to this risk.

Source: Our World in Data

What does this mean for investors?

So far, the hospitalisation rate for Omicron has been low compared with previous waves and fewer restrictions have been needed, meaning the economic impact of the variant has not been as significant as first feared. If things continue as they are at the moment, Omicron will simply delay the return to normal we have been anticipating but won’t derail it.

As economies open up, people are likely to spend less on goods and more on services. For example, they might spend less on furniture and more on eating out in restaurants as restrictions continue to ease. This shift should reduce some of the inflationary pressures in the system, which means there is less need for interest rates to rise. This means that the extent to which bond yields rise (which means bond prices fall) should be limited in 2022.

While global economic growth is slowing, it is doing so from a very high level, and we continue to expect growth across major economies in 2022. This global growth outlook means we should see another year of positive equity returns, with travel and leisure stocks set to benefit from the reopening. How all this plays out will be different for each country, depending on infection and vaccination rates, as well as to how different countries tackle subsequent waves. For example, China is persisting with its zero-Covid policy, locking down regions when a small number of cases is detected, which obviously hampers economic activity and companies’ ability to generate earnings.