Where do markets go from here?
One thing’s for sure: as the Prime Minister has already said, the Covid-19 outbreak is going to get worse before it gets better. But with Asia showing that social distancing can work and with recent lockdown measures put in place in the UK, the question becomes: what next?
Where’s the floor?
For our part, we expect the unprecedented level of monetary easing and fiscal spending to provide a floor on the inevitable economic slowdown, though globally we see a severe second-quarter recession approaching with GDP down between five and 10 per cent and unemployment spiking. We take that qualified optimism into equity markets, too, expecting them to be higher by the third quarter, but with plenty of volatility en route.
We then expect markets and sentiment to pick up in the second half of the year and into 2021. Mass testing is more likely than drug therapy or vaccine development, but it’ll nonetheless give a feeling of control over the outbreak. Much of the deleveraging, rebalancing and distressed selling is already behind us, reflected in the fund outflow data. The upshot: a volatile, V-shaped equity market recovery, though the economic recovery will clearly take longer.
2008 all over again?
We are not, despite what many commentators say, in a structural bear market as experienced in 2008. This is, for now, an event-driven bear market — positive central bank and government fiscal plans give a degree of confidence that this is a so-called black swan.
However, if this becomes systemic — rising unemployment, corporate losses infecting the banking system and a credit squeeze — then those commentators could be right. Previous structural bear markets have seen the market fall by as much as 50 per cent, compared to the 25 to 30 per cent we’re experiencing currently.
One clear risk with increased liquidity and the gargantuan stimulus packages across the word is of longer-term inflation. We expect in the medium term the disinflationary pressures of inventory unwinding, lower oil prices and cash hoarding should prevent a significant spike in the next year or so.
So where’s the upside?
Financing the recovery is going to come with long-term government bond markets, with a mass of longer-dated bonds with 10 to 30-year
maturities flooding the market. Increased supply will increase bond yields, which will help to normalise the yield curve.
We expect low rates for the long term, and contrary to some commentators, we don’t see austerity measures or tax increases in the short-term; in fact, quite the opposite.
By the end of 2020, we expect those volatile equity markets to be back in bull market territory, with China — first mover advantage — leading the increase and in positive territory by the end of the year.
And in the UK, we expect buying to be supported by pension fund
rebalancing in the short and medium term.
The extreme stimulus in the US we expect will lead to weaker US dollar, too, pushing GBP/USD as high as $1.45 by the end of 2020. As for gold? We see it going lower, too, acting more as a provider of short-term liquidity than the safe haven it has been in the past.
Yogi Dewan is chief executive and founder of Hassium Asset Management