Rudderless after a rally, stock markets look for next
catalyst
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[May 22, 2020] By
Saikat Chatterjee, Sujata Rao and Megan Davies
LONDON/NEW YORK (Reuters) - Global equity
markets have shuffled up about 1% this month despite the world starting
to re-open after the coronavirus-driven lockdowns and U.S. and European
economic data showing glimmers of a recovery.
The sideways movement is in sharp contrast to the roughly 30% rally in
late March and April, when investors were able to shrug off far more
dire economic data and look towards recovery backed by government
support.
In some ways, not much has changed in the world’s understanding of the
coronavirus and its economic impact. Some investors, economists and
public health experts have been warning for weeks that re-opening will
be slow, vaccines will take months and the recovery will be prolonged.
And yet, investors appear to be taking heed only now.
In interviews, investors said the explanation partly lies in the failure
of the market's collective wisdom. Stock markets misread how fast growth
may rebound. And now they need a new catalyst, such as a vaccine or
substantial new stimulus, before they can decide whether to flee or hold
the course. But it is proving to be elusive.
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"Markets have essentially been range bound for more than a month now
waiting for a new driver to emerge," said Mohamed El-Erian, chief
economic advisor at Allianz. He said that positive news on reopenings
and vaccines were insufficient to compensate for the string of negative
data and concerns about the sharpness of the recovery.
The market's conundrum underscores a larger predicament facing global
policymakers in the battle against the coronavirus. The $15
trillion-plus pledged in global stimulus inflated stock markets in
April, as investors took heart that governments will not let the global
economy completely melt down. But while the money kept economies afloat,
it cannot engineer a recovery.
For that, the virus must first be brought under control.
(GRAPHIC: Dead cat bounce? -
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TUG OF WAR
Kasper Elmgreen, head of equities at Europe's largest asset manager,
Amundi, described markets as caught in a "tug of war" between bull and
bear forces.
Elmgreen described the bullish forces as "the extraordinary fiscal and
monetary stimulus that came much faster and more forcefully than during
the past crisis."
On the other side, he said is persistent uncertainty over the pace and
shape of economic and earnings recovery. Markets are being premature in
pricing a return to normalcy even next year, he added.
"If there is light at the end of the tunnel, corporates are not seeing
it," said Elmgreen.
Indeed, measured against forward earnings, European and U.S. equities
are trading back at early-March levels, when the COVID-19 impact was yet
to be felt.
But with the world economy predicted to witness its biggest contraction
since the Great Depression, U.S. and European earnings should decline
40-45% in the second quarter, Refinitiv data shows.
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The Charging Bull or Wall Street Bull is pictured in the Manhattan
borough of New York City, New York, U.S., January 16, 2019.
REUTERS/Carlo Allegri
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Influential U.S. investors David Tepper and Stanley Druckenmiller recently
described markets as overvalued and with terrible risk-reward. Druckenmiller
dismissed V-recovery hopes as "a fantasy".
(GRAPHIC: Rebound in global equity valuations -
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EARLY WARNINGS
To be sure, many investors and policymakers initially believed the economic
impact of the crisis could be brief, supporting the market's optimism.
But the stock market has a history of missing warning signals. In the current
crisis, too, signs that it was not going to be smooth sailing got downplayed.
Paul O'Connor, head of multi-asset at Janus Henderson, said April "wasn't a
rally that said the world is feeling better about growth or a reappraisal of the
macro environment."
Nervousness was evident all along in bond yields that didn't rise, gold's 7%
price gain and investors' refusal to deploy the $4.7 trillion stashed in U.S.
money market funds, he noted.
There were other loud warnings, too.
Anthony Fauci, the top U.S. infectious disease expert, said as early as March 3
that it would take at least 12-18 months until a coronavirus vaccine is ready to
be deployed. On April 7, former Federal Reserve Chairman Ben Bernanke warned
against expecting a quick recovery, saying it was likely that activity will only
be restarted gradually and may need to be slowed again if the virus resurges.
CUTTING RISK
The sobering calls are coming true. Experience of countries in Asia, which had
dealt with the virus for longer than the West, show that even after months of
lockdown, consumers won't necessarily head out en masse to dine or shop,
reducing the likelihood of a V-shaped recovery.
A slow, U-shaped recovery, or worse, a W-shaped double-dip is now expected by
75% of the investors polled by Bank of America Corp's securities division.
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"We thought central bank interventions had taken out some of the tail risks in
the market," said Wouter Sturkenboom, who helps formulate investment strategy
for $350 billion in client assets at Northern Trust Asset Management.
Sturkenboom added risk, including equities, to his portfolio during the March
rout and stayed overweight through April. But last week he cut the weighting of
risky assets by 7% in favour of cash and cash-like assets.
"We worry that the initial bounce in growth will be smaller and more gradual
than hoped for. The risk of a downside surprise looks about equal to the
likelihood of an upside surprise at this point," Sturkenboom said.
(Reporting by Reuters Markets Team in LONDON and NEW YORK; Graphics by Ritvik
Carvalho; Edited by Paritosh Bansal and Edward Tobin)
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