The FTSE 100’s heavy fall on Monday should serve as a reminder that the coronavirus pandemic is far from over and more volatility will likely hit markets over the winter months, investment analysts have warned. 
The UK blue-chip index dropped 3.4 per cent – or 203 points – at the start of the week as investor sentiment was dented by the prospect of tougher coronavirus restrictions to curb a ‘second wave’ of the outbreak.
This was part of a global sell-off that also saw European and US stocks fall amid a backdrop of growing coronavirus infections and weak economic growth.
Performance of UK and global stocks over 2020
Source: FE Analytics
Craig Erlam, senior market analyst at OANDA Europe, said: “The final months of the year have long been spoken about with some trepidation as far as Covid is concerned.
“Yes, this could be the period when a vaccine gets regulatory approval but unfortunately, it comes a little late for the dreaded winter period. As UK chief medical officer Chris Whitty claimed, the seasons are against us, with late autumn and winter benefiting respiratory diseases like Covid.”
A briefing by professor Whitty and chief scientific adviser Patrick Vallance on Monday warned that the UK could see up to 50,000 new daily cases of coronavirus by mid-October, if the outbreak continues to double every eight days. This could lead to 200 deaths a day by the following month.
Yesterday, prime minister Boris Johnson laid out new restrictions for England after saying the UK had reached “a perilous turning point” in the pandemic. The restrictions, which could be in place for up to six months, including asking people to continue working from home, hospitality businesses closing at 10pm and increasing the fines for not wearing a mask or breaking the rule of six.
The market sell-off on Monday hit hardest in the sectors most exposed to further tightening of coronavirus restrictions. Companies in the leisure, hospitality and travel sectors fell the most (British Airways owner IAG was down 12 per cent), although the sell-off was broad-based and only the supermarkets were up during the session.
FTSE 100 heatmap for Mon 21 Sep
Source: London Stock Exchange
Neil Wilson, chief market analyst for Markets.com, said: “There is a clear connection between [Monday’s] sell-off and the rise in cases and the expectation this will lead to further mass lockdowns as governments continue to seem willing to kneecap the economy.
“Selling pressure has been building for some time and the dam broke today. It has not been a surprise that stocks with the greatest exposure to prolonged restrictions on movement and more quarantine rules on foreign travel have been among the hardest hit.
“Meanwhile, a heavy ramp-up in August with far too much hot money chasing too few shares, stretched valuations, the lack of a vaccine coming soon and the rising risk of volatility around the US election seems to have caught up with the markets.”
Previous forecasts by Pantheon Macroeconomics predicted that the UK economy will be about 5 per cent below its pre-Covid level at the end of 2020, but this assumed the government would not need to impose new nationwide restrictions on businesses.
However, Pantheon Macroeconomics chief UK economist Samuel Tombs said the government “might have no choice” but to order some businesses to close if coronavirus cases continue to grow as the country approaches the winter months.
Tombs argued that a full lockdown like the one imposed between late March and mid-May would not be necessary, especially as measures such as masks and social distancing mean most shops have not been major incubators for the virus.
But as cases started to climb just a few weeks after restaurants, pubs and other consumer services providers were allowed to reopen on 4 July, the “most logical first step” would be to close these businesses again, most likely for a full month to stand a real chance of curbing new infections.
“As a result, we assume that the renewed closure of consumer services providers would push GDP 15 per cent below its pre-Covid level, while it lasted, compared to a 5 per cent shortfall in our base case,” the economist added.
Source: Pantheon Macroeconomics
At the start of the coronavirus crisis, the MSCI AC World index fell more than 25 per cent (in sterling terms) between 19 February and 23 March. The UK came off significantly worse, with the FTSE 100 dropping 32 per cent over the same period.
During this time, the average fund in pretty much every sector lost money aside from IA UK Gilts (up 3.27 per cent) and IA Short Term Money Market (up 0.05 per cent). Fixed income sectors and absolute return funds lost the least, while IA China/Greater China was the best-performing equity peer group with an average fall of 10.29 per cent.
UK equity funds were the worst performers of the Investment Association universe. The average IA UK Smaller Companies fund was down 38.14 per cent, while the IA UK All Companies and IA UK Equity Income sectors lost close to 36 per cent.
Of course, that’s not to say losses of this magnitude are to be expected if a second wave and further restrictions are encountered.
Since the start of the crisis, trillions of dollars in fiscal and monetary stimulus has been unleashed to shore up the global economy and policymakers look committed to maintaining this. In addition, more is now known about coronavirus and how to tackle it, which should help avoid a return to the higher death rates in the early days of the pandemic.
But that said, investors should not write off Monday’s fall as a blip and assume markets will continue to grind higher as they did over the summer.
Erlam finished: “As far as investors are concerned, we're not seeing the panic we saw last time but [Monday] is evidence that they're not particularly comfortable either.
“The Fed and other central banks displayed incredible competence back in March when being called upon during a remarkable period for financial markets. They passed the test with ease so many not be called upon in the same way again, but that doesn't mean they won't be needed.
“Winter is coming and investors need to be prepared.”