Our companies analyst assesses the current playing field for investors and tactics they might employ.
Current investing tactics seem a cognitive dissonance equivalent of doing the splits. “Buy when all about you are losing their heads”...“the point of maximum pessimism” and so on.
Yet the US Senate has just failed for a second day to agree a $1.6 trillion rescue package for business amid fears that unemployment is already rocketing. A shocking video inside an Italian hospital struggling to cope is going viral. And dire company results are yet to manifest.
As yet, it feels any capitulation is a way off. Despite US stock indices now down over 30% since February highs, they are only back to mid-2016 levels. On the long-term chart it just looks like one in a series of sharp corrections rather than a genuine bear market.
Even 50% falls would only reach the dominant trend-line since 2009, although my sense is that this might then trigger buying of quality US tech stocks able to thrive in the current environment – and thereafter - such as Alphabet (NASDAQ:GOOGL) and Facebook (NASDAQ:FB).
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I make no apology for my chief attention on the US economy and society, given it is the likely crux for how soon we might emerge from the Covid-19 shock, or a catastrophe unfolds. US events could make nonsense of chart patterns and what’s happening elsewhere, such as China apparently recovering and going back to work.
“Heed your inner psychopath”
This saying is crude but does drive home the need for investors to put aside emotions as to how far down their portfolio might be. After attention to family and friends, now is already time to develop watch-lists of potential trades, deciphering which existing holdings can survive months of global lockdown, potentially on and off.
Shocking though the current situation may feel, it is essential to keep a sense of perspective; that a recovery will emerge and that you should be positioned for it.
My sense is that the seeds will be sown by a slowing in rates of new Covid-19 cases, rather than deaths that the mainstream media will sensationalise.
Perhaps, also, it is more significant that China and South Korea are showing that lockdowns – combined with vigorous testing and isolation of cases – can suppress the virus.
China has gone from over 2,000 new infections daily to no new cases (barring someone returning to Guangdong province from abroad).
Give or take some massaging by the Chinese state, there’s still a parallel in the way Italy has declared smaller increases in new cases for the second straight day – up 11% albeit the smallest rise since last Thursday. It is short-term, but still a downward trend akin to the Chinese experience.
Nobel laureate scientist urges: “Don’t panic!”
Amid the tumult it is easy to miss how Michael Levitt, who correctly calculated China would get through the worst of its Covid-19 outbreak far sooner than many predicted, is more concerned by social panic.
Los Angeles media reported him saying: “The real situation is not nearly as terrible as they make it out to be.” While Covid-19 doubles a person’s risk of dying in the next two months, statistically for most people the virus remains an extremely low risk.
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Having analysed 78 countries with over 50 daily reported cases, he identifies reduction in daily numbers of new cases and their percentage growth.
“Numbers are still noisy but there are clear signs of slowing growth.”
He backs this up with analysis of outbreaks in confined environments such as cruise ships.
Mind, his perspective is for individuals and based on statistic. Meanwhile, the public authorities’ dilemma is managing hospitals. Were you to fall seriously ill from anything, or have an accident, resources may be overwhelmed and unable to cope. But Levitt is right to encourage rational heads and avoidance of hysteria.
Is the hysteria reaching financial bosses?
By contrast, the US head of Sixth Street Partners – a $34 billion credit investor, part of TPG private equity – started this week with a letter to clients warning that Covid-19 may lead to a full-on credit and liquidity crisis, “a widespread downward spiral” from “the most irresponsible credit discipline in our lifetime.”
Implicitly, he reckons the financial situation is worse than 2008 and is unconvinced the US Federal Reserve’s latest declaration of unlimited QE and a zilch lending rate, will buttress market liquidity. However, I would say it is unlike 2008 in the sense of multiple over-stretched financial institutions – specifically banks, crucial to the system – poised to fail.
Admittedly, the US government must agree a fiscal package to support businesses and individuals, otherwise yes, problems will conflate. But it is prematurely alarmist to warn of Armageddon.
In worse-case scenarios of this virus mutating deadlier in a second wave, or catastrophes rolling across the US, India and Africa – where public healthcare systems lack capability – then lock-downs will persist. But, on current evidence from China and India, it is possible that key countries get over a spike in deaths within a few months, and stock markets start to recover beforehand.
Inflationary upshot of fiscal stimulus will support equities
Cash is king right now, but within six months it could be regarded even more as a wasting asset. Economists are characteristically divided as to the inflationary effects of unprecedented fiscal stimulus, where Britain so far leads the way, but I’d be surprised if we avoid rising prices.
Sterling must bear the weight of massively higher public borrowing (with no assurance, ultra-low interest rates are permanent) and whatever gets fudged by way of a Brexit deal (or no-deal) this year. Imported goods, a key feature of the British economy, will cost more.
Equities will, in due course, be seen as one vital tool for wealth protection against inflation, boosting any sentiment shift. Oil and gold are being shunned just now, in the drive for liquidity, but related stocks will jump as commodities snap back from lows. Oil’s severe bear market especially, bakes in a rebound. Fortunately, central banks and governments the world over know to avoid 1930’s depression management.
Risk of bear market rallies also
A tricky aspect is, therefore, the risk of sudden sharp rallies within an overall bear trend – should it take months for the US to pass peak infection rates and/or China’s recovery proves a false dawn. We also need to get enough of the damage to company financial reporting cleared, which has barely begun.
So, I suggest traders relish being hyper-alert on both the long and short side, meanwhile strategic investors – with ISA’s and SIPP’s – best sit back from the noise. Cultivate your watch-list for cash deployment or portfolio switches, which, according to risk preference, can range from businesses benefiting from current conditions - I've mentioned BT (LSE:BT.A) and, on a riskier note, Eddie Stobart Logistics (LSE:ESL) - to those now hard-hit yet with cash and bank facilities to survive.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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