With infection rates in many developed countries appearing to have peaked, discussions around gradual easing of lockdowns and scuttlebutt in relation to various anti-viral and vaccination clinical trials, global markets appear to be looking through the short-term economic impacts. Investors seem to be expecting economies to come out the other side of this pandemic soon, returning to "normal". This has been evidenced by rallies across most equity and credit markets during April.
We are sceptical of the strength of the rebound, concerned that the positive headlines have overshadowed the economic reality and downgrades still to flow through corporate earnings forecasts.
We have started to see economic data that encapsulate the initial virus containment measures, with March quarter data including a one month's impact. As expected, economies (including Australia) are feeling the effects of the social restrictions, lockdowns and travel bans. Now part way through the June quarter with lockdowns still largely in place, we expect economic data to worsen and generally, for company earnings expectations to be revised down further.
What does this mean for valuations and portfolio strategy?
Despite (generally) lower equity prices and some positive news, equity markets as a whole do not look overtly cheap. The table below shows the revisions to analyst consensus earnings that have flowed through so far to the US (S&P 500) and Australian (ASX 200) markets and what this means to valuations. It also indicates how sensitive these valuations are to further earnings revisions.
The numbers suggest three things:
- There have been very few revisions to earnings expectations in Australia compared with the US
- Analysts are projecting a scenario of a V shaped recovery in 2021
- Further downgrades in expectations will see some valuations look expensive
All this leaves us thinking, when considering investing our additional cash, we should not need to be in a hurry. Investors should also not buy the market blindly. Now, more than ever, is a time to focus on an investment's fundamentals as not all will emerge in good shape. We expect there will be plenty of opportunity to buy quality investments at reasonable prices.
We have started to see a number of Australian companies announce capital raisings, providing investors the opportunity to acquire shares, commonly at a discount to the current market price. History has shown that when good quality companies raise capital in these circumstances, patient long-term investors are often rewarded. We will continue to look for these opportunities.
The pandemic appears far from over, however there are positive signs. We expect markets will continue to be volatile as attentions focus more on the economic impact. We will continue to monitor developments closely while taking opportunities to build on our existing exposure to markets.