Markets continue rapid rebound as restrictions ease - Raiz Invest

Raiz Market Insights

12-05-20

From George Lucas, Raiz CEO

 

Making sense of rising equities despite COVID-19

Last week global equities continued their rapid rebound despite the COVID-19 pandemic and dismal news on the state of the global economy.

While equities plunged after coronavirus hit in February, the US equity market as measured by the S&P 500 has risen by almost 30 per cent from its intraday low on 23rd March and is now trading around the same levels as in mid-2019.  Other global markets have also recovered but not as quickly as the S&P 500.

The worst is likely yet to come in terms of the economic data, but so far, bad data has not stopped the equity markets globally, from rallying.

 

Investors confident of quick economic recovery

Two key factors appear to underpin this rally in equities. The first is that investors are looking through the bleak near-term outlook and focusing on the prospect of a quick economic recovery in the second half of the year, once the pandemic is brought more under control.

The second factor is the massive fiscal and monetary policy response to the virus-induced economic shock. Central banks, led by the US Federal Reserve, have gone to extraordinary lengths to backstop the financial system and shore up asset markets.

The fiscal support packages put in place by most major countries, as well, are far larger than anything seen before in peacetime. More importantly, expectations that monetary policy will be kept extremely loose for years to come have boosted equity prices.

However, key downside risks remain as nations move into the recovery stage, including secondary virus outbreaks as economies reopen, a long U-shaped recovery, or a breakdown in the consensus for maintaining policy support both fiscal and/or monetary policy support.

 

Underperformance in emerging markets

One feature of the recent rally has been the underperformance of equities in emerging markets relative to those in developed markets.

One big reason for the underperformance of emerging markets equities has been the collapse in commodity prices, with the GSCI’s index of industrial metals has dropped by 10 per cent over this period. The fall in commodity prices has hit EM equities disproportionally.

The underperformance of emerging markets equities has also coincided with the number of coronavirus cases rising more sharply in emerging markets than developed markets since mid-March. Another factor has been the relentless outperformance of US equities, which has been driven by the five largest listed stocks, mainly in Tech, in the US.

 

US-China trade war at risk of flare-up

Last week also saw signs of a re-escalation in trade tensions between the US and China led by President Trump when he said that he was “watching closely” to see if China was living up to trade-deal commitments to purchase large quantities of US goods.

President Trump seems to view putting pressure on China as a vital part of his strategy ahead of November’s election. With his approval rating now standing at just 43 per cent, it is likely that tensions with China could remain high, at least until the US election is over.

For equities, if the previous trade war is anything to go by, another stoush would benefit equites in the US while hitting those in China and the rest of emerging markets.

 


 

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