Everyone in the global financial market wants the same thing. They want to find a bit of data they can absolutely believe to be accurate and they want to use it to cut the risk levels embedded in their portfolio.
Too bad. They can’t have accuracy on anything and there are no low risk assets to buy. That everyone knows both these things explains the hysterical swings in indices this week. By Friday, nine trading days in March had made it on to analyst lists at Bianco Research as the biggest one-day gains and losses since the second world war. No other month comes close.
All is not lost, however. It is possible that we are near — or have even passed — the peak uncertainty bit of this crisis.
We know for example that Covid-19 cases probably peaked in China in early February, and now look to be peaking in Italy. We also know that China is recovering fast: according to Macquarie, coal consumption is at 95 per cent of the normal level for this time of year, traffic congestion is normalising and car sales are even rising again (slightly). The consensus appears to be that China is 85 per cent back to normal.
We also have a sense of just how bad things were at their worst in China: industrial profits fell by 38 per cent in February. So we have a rough — very rough — guide as to what might happen elsewhere, leaving aside second round infections. Think: a month of complete lockdown, followed by a few slightly easier months and, barring any new horrors, a return to a new kind of normal by early June.
We know one other important thing too: governments and central banks are prepared to blow more than the doors off our current monetary and fiscal systems to get their economies to the other side (30 per cent of the world’s population is in some form of lockdown).
They are prepared to blur the line completely between monetary and fiscal policy, with unlimited money creation and spending, to try and replace the parts of the economy they have shut down. The new package from the US comes in at nearly $2tn, which is a genuinely stunning 9.5 per cent of gross domestic product — or what GDP once was. Total global fiscal stimulus now comes to about 3 per cent of global GDP.
You might not like all of this. You might note that no amount of cash can make restaurant bookings rise from zero when the collapse in growth is due to physical restraint. And you might be terrified of the post-virus consequences of what amounts to helicopter money, as there will be no option but to monetise government debt from here on. But it does at least provide a clarity, of sorts.
Passing peak uncertainty is not the same at achieving certainty. But some forecasts are coming back into the market. US earnings are expected to fall by up to 60 per cent over the next couple of years, rather than rise this year by 10 per cent or so, as was expected in January. And the GDP of most economies is expected to fall by something like 35 per cent during the periods they are locked down: this, at least, is what Capital Economics suggests.
What about equity markets? We have some sense now of where we are going. We also know that markets tend to turn three months or so before economies do. So should we assume that this has been the fastest bull-to-bear-to-bull turn in history, where some of the worst short-term fundamentals ever have been overwhelmed by the greatest stimulus package in history?
In-out-and-in-again in just a month would be too brave a call. If this crash works like most crashes, there is every chance that we will test the lows again. Just ask any technical analyst! But there is definitely reason to start buying.
The first thing to note is that even after the bounces of this week, equities are no longer expensive. So-called Shiller price to earnings ratios, one of the better indicators of long-term value, show that equities, particularly outside the US, are at 20-year lows at least.
It’s also worth noting, as Pictet’s Luca Paolini points out, that while you might think you have just lived through one of the greatest bull markets ever, if on Wednesday you had looked at the last 10 years only, some 90 per cent of global markets were showing negative returns.
It’s also hard to see the alternative to stocks. The bond market is hardly a long-term safe haven. Cash isn’t either: in the short term, too many dominoes are falling in too many places to be sure of the financial system. In a world of limited crisis hitting unlimited stimulus, inflation is also a worry.
So buy for the long term, but buy carefully. There is a good argument that in a time of unbounded quantitative easing, it doesn’t matter what you buy. All equities, all assets even, will move in tandem. But why take the risk? In most bear markets everything goes down. But not everything comes up again.
So buy the things that probably will. Market leaders with little or no debt, experienced management, operating in sectors that offer some relief during lockdowns. And think about the Fangs: Facebook, Amazon, Netflix and Google. The giant tech stocks that led the US bull market for the last decade had become so stupidly expensive that many thought they would also trigger its end. Instead they are the companies providing the few services we now really need. You can’t put a price on that.
—Copyright The Financial Times Limited 2020