Lex letter from London: braving the UK’s ‘Brovid’ markets

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Dear readers,

There is unexpected British comedy gold on the sidelines of the tragedy that is coronavirus. It comes in the form of iAbra. This small business claims to have built a Covid-19 test inside a “black box”. Supposedly, a microscope and camera beneath the housing can swiftly tell whether a mouth swab contains the Covid-19 virus.

This, if true, would be a huge coup for a four-person business based in a village and headed by a man with no formal scientific training — as a Financial Times news piece by Anna Gross and Jemima Kelly relates.

The company, represented on the stock market by test equipment manufacturer TT Electronics, would be responsible for a breakthrough that has eluded the world’s smartest scientists and engineers.

Heathrow’s apparent enthusiasm for the iAbra test casts shade on a tale otherwise smacking of the black-and-white antics of old Ealing comedy movies. The airport helped launch the machine, though it is not yet a customer of iAbra.

Perhaps Heathrow is desperate. The impact of coronavirus on travel businesses has been amplified in the UK by the inadequacy of testing provided by the government.

There is a backlog of 185,000 test swabs. Britons who want to find out whether they have coronavirus may be directed to a test centre hundreds of miles away. They are the lucky ones. Other worried citizens are confronted on the government’s website by this message: 

The fiasco raises a couple of possibilities for investors to consider. The first is that Covid-19 test capacity and equity values are connected. In March, Germany was doing almost 100,000 tests a week, when England could only manage 5,000. The UK has recently been reporting the completion of more than 1m tests per week, with Germany somewhere below that. But Germany’s early lead does appear to have helped it contain the outbreak better.

The Dax index, which lacks substantial uplift from the tech stocks that support the US, has recovered well since mid-February, leaving it just 4 per cent lower. The FTSE 350 is weaker, still down 18 per cent since the outbreak became a serious issue in Europe.

Correlation is not causation. But there is some undoubted alignment between administrative competence and investor confidence. Mr Bean was fitfully amusing in his movie channelling of the British propensity for muddle. You just don’t want him developing Covid-19 test machinery, or perhaps trying to deal with two national crises at once.

Column chart showing positive coronavirus test results received on the day  the test was taken or the day after (%)

The UK government is struggling with Brexit withdrawal as well as coronavirus. According to Jefferies analysts, a new word has been invented — Brovid — to describe “the simultaneous fear of a no-deal Brexit and the inability to get the UK Covid-19 reproduction rate below one”.

Jefferies says markets are at present sanguine in the face of both challenges. But this could be because economic data — notably payroll figures — have been better than expected.

City readers may also have been heartened by news that the EU is extending its banks’ access to London clearing houses by 18 months to mid-2022. But this, according to Philip Stafford and Jim Brunsden of the FT, is mainly to make it easier for lenders to switch to EU-based clearers. The European Commission wants banks to reduce their reliance on the UK.

The main bone of contention is the huge trade in derivatives via London, with the systemic financial risks that it creates.

In saner times, banks and brokers could have lobbied in the hope of a Brexit transition that limited the long-term impact on their industry. But with the government bungling life-and-death challenges in real time, an untidy, painful separation is a more likely outcome. That Brovid discount will persist in UK stocks.

By the way, the FT has not invested in the iAbra machine. But some very nice people do now take you aside on your way into our London offices if your temperature triggers the heat sensors. Japanese noodles and green tea for lunch are a sure way to set them off.

Enjoy the rest of your week,

Jonathan Guthrie
Head of Lex

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