Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 358

Which market comes out first in a recovery?

The quickest, sharpest decline in history (-35% in 23 days on the S&P500 index) was followed by the quickest, sharpest rebound (up 30% in four weeks), so the question now is: Where do we go from here?

We have seen some encouraging news of peaks in the pandemic across many Asian and European countries as well as some US states. Many governments are reopening their economies gradually. However, this process will be gradual and staggered, not a straight line.

The recovery will be slow and it is unlikely to be seamless. Moreover, fundamentals are still deteriorating rapidly, and we do not know how bad the economic picture will become. 

Bear markets take time

Since their March 23 trough, most equity markets have retraced at least 50% of their losses. Is this a bear market rally or a V-shaped recovery? We believe that another leg down is likely.

Looking back, history suggests a V-shaped market recovery is rare. Since the 1920s, the S&P500 index has experienced 14 bear markets (as defined by a 20% decline). During these periods, there were 19 bear market rallies in excess of 15% before falling again.

Only one bear market (1932-33) saw markets recover to prior peaks within a year. Historically, it has taken 15 months (on median) for the MSCI All Country World Index to recover to prior peaks after bottoming, and about 20 months for the S&P500, the MSCI Europe and the TOPIX indexes to recover to prior peaks. It took four years after the GFC for global markets to return to pre-crisis levels.

The S&P500 index retracement to about 50% of its losses acted as a ceiling during the dot com crisis and the GFC. Policymakers have been more pro-active and aggressive this time than in the past, which should help shore up confidence and limit the damage.

In our view, markets are being optimistic. The recent rebound is not pricing in the reality of the situation, the risks that still lie ahead, nor the scars left behind. Yes, markets typically front-run economic data, and fiscal and monetary support is massive, but markets cannot ignore fundamentals, both in terms of growth and earnings.

In addition, the ramp up in activity is likely to be much slower than anticipated, suggesting it will take quarters and not months to recuperate output losses. As such and given the ‘quality’ of the rebound so far, we believe that markets will likely see another leg down in the coming months.

What comes out first?

The scale and scope of central bank support makes a strong case for credit markets as a first investment allocation – “buy what the central banks are buying” is a pretty easy adage to follow. Moreover, while spreads did not reach the heights of 2008 levels, they are much more attractive than they have been for some time, offering attractive entry points. We prefer investment grade over high yield, given much more central bank support and less default risk.

Expectations that US growth will hold up and recover better than Europe means earnings should recover quicker, which also supports the US. Emerging Asia should benefit from being first-in-first-out of the crisis and should outperform other Emerging Markets regions.

We are likely to see some long-term legacy from this crisis as well. The de-globalisation trend that began even before the pandemic will be exacerbated as reliance on global supply chains has created vulnerabilities. As such, we expect the repatriation of strategic industries such as healthcare and defence to begin in earnest. Given even bigger reliance on technology, protecting this industry will become paramount.

We believe that downside risks remain and that equity markets are likely to remain volatile and see another down leg. Nonetheless, active managers have the opportunity to take advantage of market dislocations in this environment. In the current context, humility and risk management are key words.

 

Esty Dwek is Head of Global Market Strategy at Natixis Investment Managers Solutions. This article contains general information only as it does not take into account any individual’s personal financial circumstances.

 


 

Leave a Comment:

     

RELATED ARTICLES

After 30 years of investing, I prefer to skip this party

Citi’s Gofran Chowdhury: clients don’t think the worst is over

Six ratios show the market is off the charts

banner

Most viewed in recent weeks

Three steps to planning your spending in retirement

What happens when a superannuation expert sets up his own retirement portfolio using decades of knowledge? He finds he can afford much more investment risk in his portfolio than conventional thinking suggests.

Finding sustainable dividend stocks on the ASX

There is a small universe of companies on the ASX which are reliable dividend payers over five years, are fairly valued and are classified as ‘negligible’ or ‘low’ on both ESG risk and carbon risk.

Among key trends in Australian banks, one factor stands out

The Big Four banks look similar but they are at fundamentally different stages as they move to simpler business models. Amid challenges from operating systems, loan growth and neobank threats, one factor stands tall.

Why mega-tech growth are the best ‘value’ stocks in the market

They are six of the greatest businesses ever and should form part of the global portfolios of all investors. The market sees risk in inflation and valuations but the companies are positioned for outstanding growth.

How inflation impacts different types of investments

A comprehensive study of the impact of inflation on returns from different assets over the past 120 years. The high returns in recent years are due to low inflation and falling rates but this ‘sweet spot’ is ending.

How to manage the run down in your income in retirement

The first of five articles on modern retirement income products that aim for an increasing pension that lasts for life and on average should not decline in real terms. They are not silver bullets but worth a look.

Latest Updates

Superannuation

Retirement income promise relies on spending capital

The Government has taken the next step towards encouraging retirees to live off their capital, and from 1 July 2022 will require super funds - even SMSFs - to address retirement income and protect longevity risk.

Superannuation

How retirees might find a retirement solution in future

Superannuation funds need to establish a framework that offers retirees a retirement income solution that lasts a lifetime. It will challenge trustees to find a way to engage that their members understand and trust.

Investment strategies

Dividend investors, your turn is coming

Dividend payments from listed companies, depended on by many in retirement, have lagged the rebound in share prices over the past year. Better times are ahead but sources of dividends will differ from previous years.

Investment strategies

Four tips to catch the next 10-bagger in early-stage growth

Small cap investors face less mature companies with zero profit that need significant capital for growth. Without years of financial data to rely on, investors must employ creative ways to value companies.

Investment strategies

Investing in Japan: ready for an Olympic revival?

All eyes are on Japan and the opportunity to win for competing athletes. After disappointing investors for many years, Japan is also in focus for its value, diversification and the safe haven status of its currency.

Fixed interest

Five lessons for bond investors from the Virgin collapse

The collapse of Virgin Australia not only hit shareholders, but their bond investors received between 9 and 13 cents in the $1. A widely-diversified portfolio can tolerate losses better than a concentrated one.

Investment strategies

The 60:40 portfolio ... if no longer appropriate, then what is?

The traditional 60/40 portfolio might deliver only 1.5% above inflation in future without diversification benefits. Knowing an asset’s attributes rather than arbitrary definitions is better for investors.

Retirement

Two factors that can transform retirement investing

Retirees want better returns but they have limited appetite to dial up their risk exposure in order to achieve it. Financial advice and protection strategies in portfolios can enhance investment outcomes.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.