Market outlook: Optimism versus reality
In this latest outlook piece, our Asset Allocation team questions whether investor optimism is a little misplaced.
As countries have started to emerge from stringent lockdown measures, stockmarkets around the world have recovered from their recent March lows. To all intents and purposes central banks and governments have initiated such generous, if only temporary, packages of economic measures that global economies have, for now, been saved from the clutches of an even worse economic downturn. There is a sense of investor optimism in the air.
The path of COVID-19
But we don’t believe we are out of the woods yet. The path of COVID-19, with all its twists and turns and the resurgence of the virus in many countries, is still uncertain. As is the timing of a large-scale development of a vaccine. We expect to see mounting evidence of longer-term negative economic effects. For some companies, filing for bankruptcy is a distinct possibility. For some people, job prospects for the rest of the year hang in the balance.
It is true that economic data compiled by our economics team suggest that the great re-opening of economies appears to be proceeding somewhat faster than anticipated. But regardless of whether you expect a quick economic recovery or not, the statistics are likely to improve for a while as the major economies begin to roll back containment measures, in our view.
However, as we head into the second half of the year, our view is that financial markets are underestimating the risk that economic growth weakens again. In other words, we believe there is a disconnect between the current level of share prices and what is going on in the ‘real’ economy (the production of goods and services). This is particularly the case in the US stockmarket, where, we believe, present-day company valuations appear high relative to how they have looked in the past.
Too far, too fast?
Even though, we believe, some stockmarkets have rebounded too far and too fast from their March lows, we continue to believe certain sectors may do well. In the current pandemic, the increased use of online retailing and working remotely has highlighted the appetite for technology in general.
We also believe that as politicians become wedded to the idea of increased borrowing to stimulate their economies, financial markets may come to expect higher inflation. Gold has historically served as an investment that has typically done well in times of rising inflation.
But, irrespective of whether inflation rears its head or not, as we head into the second half of the year, and are better able to assess the degree of damage the current pandemic has inflicted on global economies, we should have a clearer idea of whether or not investor optimism is justified. Watch this space.
Remember, the value of any investment is not guaranteed. The value of investments and any income received from can go down as well as up and you may not get back as much as you had originally invested.