Company / Analytics

Analytics, 19 April 2020

Some Reflections on the Current Stock Market

Stock prices usually reflect what the world will look like in the future rather than the present. The current state of the market, recent reactions by investors and current market pricing suggest investors are counting on a speedy rebound. But it also suggests that they are already planning for 2021 since 2020 will be an economic write-off for most companies.

With the uncertainty surrounding the impacts of coronavirus on economies (at both national and global level), stocks are likely to remain lower priced than their pre-coronavirus levels, except for occasional price gains caused by actions of major investors or government interventions.

What Asset Managers have been up to?

Experienced market experts, asset managers, and even analysts understand that the virus is here for the long term. The signs of a long-term crisis are already visible – massive job losses, slashing incomes, stagnant economic activities, and a global recession. In the long term, these would translate to zero returns, defaults, bankruptcies and slashed real asset values from aircraft to factories and property, to name a few.

The job of asset managers is to generate returns. For now, they are riding on hopes of an early end to lockdown and resumption of economic activity apart from being motivated by state interventions – which are the main factors responsible for pushing markets higher at the moment. But since 2020 is likely going to be an economic write off as returns will be crippled by zero dividends, many are already planning for 2021.

Asset managers are already locking in returns for 2021 (and maybe even 2022) by investing where they will generate a return in either a post-crisis situation or the sooner economic activity resumes. Investment managers are scrambling for assets, even as corporates desperately seek cash to get them through the remaining quarters of the year.

Some have gone for what many would consider risky (or unlikely) stocks such as Airbnb. Risky moves if the markets splinter, but good strategies that will generate decent returns when economic activity resumes.

Airbnb was supposed to be the most wanted IPO of 2020, but due to the current crisis, the IPO is likely to be postponed to 2021. We had a detailed article on its development earlier this week here.

Tesla stock is also up, rising by up to 65% between April 2 and April 16 and about 80% year to date. Wondering what’s behind its unstoppable run? According to analysts, Tesla tapped capital markets and cushioned its balance sheet earlier in February when COVID-19 was still seen as a China affair and is very unlikely to face liquidity challenges. Moreover, Tesla is a market leader with more edge and first-mover advantages in the transition to electric vehicles.

Tesla is benefiting from hopes that it is much better positioned to weather the economic destruction caused by the coronavirus storm compared to its Detroit peers. Investment banks are positive about its expected revenue growth and have slapped buy-recommendations on the stock. The hope is that if Detroit-based car companies succumb to the storm, Tesla will swim through well. Tesla already disclosed record first-quarter deliveries amid the launch of Model Y and China factory, while its March sales in China hit a record.

Investors are also all over Softbank offering funding and acquisition packages. The Japanese tech investor announced up to $41bn in asset sales and a record share buyback to shore up its collapsing share price.

The stock market believes in Central Banks

The stock market believes in Central Banks. This is evident in market reactions following government interventions to cushion the market from the COVID-19 crisis. Governments across the world are putting in place measures to cushion the economic impact of the coronavirus.

In the United States, for example, President Donald Trump signed a $2 trillion coronavirus emergency spending bill, and investors are betting on an additional $2.3 trillion in lending programs from the Federal Reserve. Other interventions include the Central bank decision to buy good investment-grade and junk bonds which have seen stocks and commodities such as gold rally while others such as oil have tanked due to state interventions or lack of enough interventions.

Asset managers believe that such interventions will enable major companies to emerge with little damage to their long-term profitability. And these interventions have been behind recent rise and fall in stocks and commodity prices.

On a global scale, the IMF is extending up to $1 trillion lending capacity to help countries around the world that are struggling with the humanitarian and economic impact of the novel coronavirus and is calling for global coordination on recovery stimulus.

Global Growth

On the global economy side, it’s clear that we are already in a recession and this means a lot for investors. The current recession is unique than previous ones it’s triggered by a health crisis when things were just running normally. So, the sooner we are out of the crisis, the sooner the economy resumes? Yes. But the impacts will be long term. We’ve already seen a wave of layoffs and massive unemployment insurance claims in the United States, for example. A quicker recovery will be undermined by a wave of bankruptcies that will follow the crisis which will make the current recession as bad or worse than the 2009 financial crisis.

Already rating agencies, have reduced their baseline forecast of the year and the decline in both GDP and economic activity for the year looks scary. For example, the IMF expects global GDP to decline by 3% (a 6.1% percentage point decline from its previous estimate of 3% global growth in 2020). On the other hand, economic activity in the US, Eurozone and UK GDP will fall by 3.3%, 4.2%, and 3.9%, respectively, according to Fitch’s Ratings. China’s recovery will also experience disruption, and its annual growth will be below 2%.

Though there will be a rebound, the IMF forecasts that output will still be down by 5% in 2021. The IMF predicts positive growth in China and India. Asian stocks are already picking up if better-than-expected Chinese trade data for March is something to buy. According to the report, China’s exports in March fell by 6.6% from the same period a year earlier, a smaller drop than the 14% plunge that analysts had predicted.

What are some of your thoughts or reflections about the current state of the financial markets?


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