Prolonged COVID-19 outbreak is putting pressure on covenants 

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Professional concern has ticked up by 11%, while personal and family worries have decreased slightly. Some UK pension professionals have started returning to the office for a limited number of days, but a majority (77%) are still working from home. If commuting to work isn’t raising concerns, what is? 

No end to outbreak in sight   

The COVID-19 outbreak is not likely to subside until the end of March 2021, our panel believes, which will mean over 12 months living with the virus. In April, UK pensions professionals expected the outbreak to last a minimum of three months. But three months have now become six, and the horizon keeps being pushed further out. 
Some UK pension professionals are optimistic about the low infection rates in their area, while others have nothing more than their trust in safety measures and available treatments for COVID-19. Some say that the government guidance remains confusing and lacking in detail on what people can do safely, while others say the measures are sensible - but that people are deliberately mocking and ignoring them. 

The continued outbreak is putting pressure on covenants 

The proportion of schemes which have seen their covenant weaken since the start of the pandemic has increased from 40% a month ago to 52%. Insolvency risk is also a recurrent theme amongst those UK pension professionals who express greater COVID concerns from a professional standpoint. The minimum expected duration of the pandemic’s macro effects still suggests that economic activity won’t recover until February 2023, and its full impact on businesses is yet to be seen. 

Inflation expectations are falling 

The macro rate indices suggest that expectations for higher inflation have reduced, back to levels last seen in August. Do UK pension professionals think deflation is more likely than inflation? 
Upon closer examination, a month ago 88% expected inflation to rise (chart not shown), whereas 44% expect it to stay the same now (see chart below). This may reflect the Bank of England’s lower August inflation projections, so we will keep an eye on changes in the coming months. 

Sector sentiment suggests adjustments in expectations 

The indices for ‘winner’ sectors like IT and healthcare have taken a nosedive. Is the rally running out of steam? Our data suggests so. The proportion of UK pension professionals who see the IT sector as a ‘winner’ has dropped from 100% a month ago to 78%. As for healthcare, the drop in ‘winner’ votes is down from 88% to 78% (see charts below). 
At the same time, the outlook for the consumer discretionary and consumer staples sectors has improved. Does this mean consumer optimism has returned? We don’t think so. If 37% now see consumer staples as a ‘winner’ in the pandemic, compared with 29% a month ago, this may signal worries about renewed lockdowns. At the same time, while 82% saw consumer discretionary as a COVID-19 ‘loser’ a month ago, 44% now have a neutral view, perhaps reflecting lower valuations and earnings expectations. 

How have your expectations evolved during the COVID-19 pandemic? Click here to tell us in our bi-weekly survey. 


Previous articles in this series: 


About the COVID Concern Index 

This short survey helps gauge sentiment of our community on the pandemic. The results are distributed via the community newsletter. Until 31/08/2020, this was a weekly survey. From 01/09/2020, the survey shifted to a bi-weekly cadence. 
The COVID Concern Index values should be used as indication only and do not constitute advice. Their values are bound by the choices available in the survey on which they are based. 
COVID Concern Index: 
  • 0 = respondents are not worried at all 
  • 100 = respondents are extremely worried 
Expected minimum duration of outbreak: 
  • Lowest possible value = 1 month 
  • Highest possible value = 6 months 
Expected minimum duration of macro effects: 
A methodology change took place on 15/04/2020, affecting data from 21/04/2020 onwards. 
Prior to 15/04/2020: 
  • Lowest possible value = 3 months 
  • Highest possible value = 12 months 
Following 15/04/2020: 
  • Lowest possible value = 3 months 
  • Highest possible value = 60 months 
Macro rates index: 
  • -100 = respondents think rates will fall 
  • 0 = respondents think rates will stay the same 
  • +100 = respondents think rates will rise 
Sector sentiment index: 
  • -100 = respondents think the sector will be a ‘loser’ in the pandemic 
  • 0 = respondents see a neutral outlook for the sector 
  • +1 = respondents think the sector will be a ‘winner’ in the pandemic 
Concerned about the coronavirus outbreak and its macro implications? Click here to take part in the bi-weekly COVID-19 survey.