Last week we outlined how policymakers are acting swiftly and creatively, buying us time to manage the medical crisis, while supporting society and the economy. As the number of infected increase, markets have set a path that seems unusual. While US infections have doubled in three days to the highest level of infection in the world, the US share market has bounced about 18% from their low of earlier in the week. This has investors either scratching their head or believing some of the risks have abated.
We hear many investors comparing this period to the Global Financial Crisis (GFC) considering the market weakness and volatility. Perhaps the most obvious difference is, the current situation is being caused by a medical crisis, rather than systemic weakness of the financial sector. The social, economic and market impacts are quite different. The response from governments and central banks has also been quite different. Recent policy actions have been more rapid and broader than those during the GFC.
Unlike the GFC where it took both central banks and governments 12 to 18 months to get ahead of the problems, it has taken only weeks to see significant initiatives in place. We expect this rapid response and the greater breadth of policies will help to mitigate some of the risks. It seems that most central banks have a 'do whatever it takes' attitude to ensure there is liquidity, very well supported by governments with fiscal policy providing financial support to individuals and businesses.
Policymaker's proactive responses to date suggest the experience may not be the same as that of the GFC. This level of response begs the question: is this enough to see markets bottom? This question is particularly interesting given this week's bounce in equity markets. We caution investors against becoming overly optimistic…yet. Especially given the still rapid growth in infection rates around the world.
This week we saw the US Congress finally agree to a mammoth US$2.2 trillion (yes trillion) package. This equates to half the US Government's annual budget spending and is equivalent to over 10% of the country's annual GDP.
Also, we also saw major European governments do their bit including a €1 trillion stimulus package from the German government, equivalent to 30% of its annual GDP.
There remains a great deal of uncertainty around containment and business impacts and hence, the potential for disappointment. Consequently, we expect volatility in markets to continue.
For us to gain greater comfort in materially lifting equity allocations, we would like to see:
- Further fiscal stimulus being delivered by governments when required;
- Solid evidence of containment of the virus in each of the major developed economies. The relaxation of regional lockdowns would also likely follow;
- Clarity on business conditions. As it stands today, we believe corporate earnings estimates remain unrealistically optimistic and we await a further round of downgrades to expectations; and
- Positive news on the successful development of anti-viral drugs and an eventual vaccine for the virus.
While there are a number of positive developments underway, we continue to take a cautious approach to portfolio management: building and retaining our cash positions, waiting for clearer signals to emerge.
Please make sure you reach out if you have any concerns or would like to know more. You are our priority!