Global markets were lower on Friday, with Wall Street ending a massive three-day surge as the number of coronavirus cases in the country continue to surge.
Despite the Friday dip, US markets were the strongest in 10 years last week as they staged a partial recovery from recent lows after the announcement of a $2 trillion US stimulus package.
Recovery from Corona-virus – A Buying Opportunity?
We are in a fast-moving and fluid situation with regards to the impact of corona-virus on financial markets, highlighted by the fact that we have experienced the fastest bear market in record.
There are signs real-money investors like pension funds are ready to step in and buy now that panic liquidations look to have slowed. There are also signs of improvement in some of world’s regions that were hardest-hit by the virus (China, South Korea) which shows a road map to others. On the other, the number of infections globally continues to accelerate with large scale containment measures being put in place to “flatten the infection curve”.
In the last few days, we have seen markets recover some lost ground, so the question on everyone’s mind is, what shape could a potential recovery take?
The image below shows that in 1987 when we had a similar short and sharp crash, it was followed by a sharp reversal, However, in 2001 and 2008 we had a long drawn our bear market followed by a long recovery. This implies the brutality of the crash may signal the speed of the recovery – although this is obviously a small sample size.
It is a big positive that central banks and governments around the world have learnt from the 2008 Global Financial Crisis. They are being extremely pro-active in terms of reducing the economic impact from coronavirus containment measures. We cannot avoid a global recession in the interim, but the actions provide support in time of crisis. Unprecedented global monetary and fiscal stimulus also means that a recovery may be faster than in prior economic shocks. In any case, markets will turn higher well before the economy. So, the next question is when will markets potentially start to recover?
If we look at the SARS crisis, the rate of growth in new cases mattered. When the growth rate peaked, markets turned shortly after. The Wuhan lockdown lasted 50 days, which means that the US and Europe should be prepared that we may get to at least early May in containment mode. This would also align with Summer in the Northern hemisphere, which is important as the coronavirus appears to spread less in warmer temperatures.
The above comments are certainly not without risk. The key risk in our view is that the lockdown lasts much longer than expected. Based on a 2-month lockdown period, most analysts are forecasting a 25% – 30% drop in earnings per share for US corporates in 2020, before a rebound in 2021. Clearly if major economies are closed for longer, such as for 6 to 12 months, there is huge downside risk for share markets.
Overall, we see opportunities to selectively buy stocks on a medium-term (1 to 3 year) view which are relatively immune or relative beneficiaries of coronavirus, but have been caught up in the market sell-off and hence are trading at more attractive valuations. Given the uncertainty around how long global economies will be shutdown, we have begun averaging into stocks with a view to do so over the next few months, while watching coronavirus developments closely.
As Warren Buffett says, 'Be greedy when others are fearful', something that is easier said than done. While the near-term economic situation appears bleak, our base case is that we are more likely than not setting up the best buying opportunity since the Global Financial Crisis in 2008. The darkest hour is just before the dawn.
Later this week we will be publishing a report on our top stock picks to play an eventual stock market recovery.
Australia & New Zealand Market Movers
The Australian market tumbled on Friday (ASX 200 index -5.3%) but still finished the week with a small gain. All sectors finished lower, led by Real Estate Trusts which tumbled 8%, while Healthcare also slumped 7%. Woodside Petroleum has slashed US$2.4bn in spend, which drops its cash breakeven price required for oil to approximately $20 a barrel. Ooh Media’s undertook a successful equity raise removes near term liquidity risk and provides welcome headroom relative to banking covenants.
The NZ market snapped a three-day rally in volatile trading (NZX50 -0.8%), as investors continue to assess the impact of global shutdowns. Property stocks were also under pressure after reports that large firms were putting landlords under pressure by refusing to pay rent through the lockdown. Many stocks continued to rally from record lows despite the index being down on the day, including Tourism Holdings, Sky Network Television and Air New Zealand. Kathmandu announced a significant number of its stores around the world would be temporarily closed due to shutdowns and it was undertaking “aggressive cost saving initiatives” including negotiating rent payments, which should help it reduce its “cash burn.
3 Things Markets Will be Watching this Week
- Coronavirus related news-flow remains key in terms of driving investor sentiment.
- Moves from central banks & governments globally in response to coronavirus,
- Key economic news events this week include the latest jobless claims data in the US along with nonfarm payrolls.
Have a Great Day,
