Global equities last week posted further gains of around 2% and are now up close to 25% from their lows having recovered half their losses. The rebound has been the fastest ever from a bear market, with the gains taking less than a month, just as the sell-off itself occurred at record speed.
The sharp rebound is rather at odds with the latest economic news which confirmed the full extent of the downturn now being faced. In China, GDP contracted 6.8% y/y in Q1, a far cry from the 6.0% gain seen the previous quarter.
Meanwhile, the IMF released its latest economic forecasts which made for grim reading. It is now projecting global GDP to fall 3.0% this year, compared with a drop of only 0.1% in 2009 during the Global Financial Crisis. Furthermore, the IMF expects it to take until the end of next year for GDP in the advanced economies to recover to pre-COVID 19 levels. Finally, it believes the risks to its growth forecast are all to the downside.
Last week also saw the first hard evidence of the impact of the downturn on corporate earnings. The big US banks reported sharp falls in profits, reflecting both a fall in revenues and large provisions for future losses on their loans.
Corporate earnings estimates have already been revised down significantly and further downward revisions looks certain to come. The result is that global equities – despite remaining 16% below their January high – no longer look cheap. Indeed, forward looking price-earnings ratios are back up to around their long-term average.
Equities, however, appear to be ignoring all of this, hoping instead that a combination of the vast monetary and fiscal stimulus and the easing in lockdowns now planned in a number of countries herald a fairly quick return to normality. The re-start of large-scale quantitative easing and hefty injection of liquidity into the markets has only provided further reason for the markets to look on the bright side.
The truth is that a great deal of uncertainty remains over how serious and prolonged this downturn will turn out to be. It is still far from clear how easy it will be to keep COVID-19 under control while allowing life to return to normal.
Markets are always forward looking and the fact that they are already looking through the downturn to the recovery the other side is no surprise. What makes us cautious and fearful that markets could fall back again, is that they now seem to be pricing in a fairly rapid return to normality which is far from assured.
We are in the process of scaling back our UK small/mid-cap equity exposure and will be holding the proceeds in cash for the time being, looking to reinvest it in equities at cheaper prices. When we do, we intend to reinvest the cash in global higher quality growth stocks which should fair relatively well in what are likely to remain demanding times for companies.