Pent-up demand and fiscal stimulus could see the return of the bull market in a matter of months, but investors should be rethinking their assumptions about the financial landscape post-crisis.
Investors should think about how economic and market behaviour will be altered once the coronavirus crisis is over and “business as usual” resumes.
“We will return to some normalcy, but things won’t be exactly the same,” said Rob Sharps, head of investments and group chief investment officer at T. Rowe Price.
“The pandemic will certainly affect the calculus of the US elections, for example. Certain companies and industries will be fundamentally altered. For investors with a long-term orientation, this isn’t the time to let a psychology of fear dominate their decision-making. We’ve faced challenging markets in the past and, in time, moved beyond them. We think this will be true again this time.”
Mr Sharps believes that a rapid acceleration in economic activity and earnings growth could see the return of the bull market in a matter of months, but that now is the time to consider which companies will survive the disruption.
“Focus on whether companies are positioned to make it in the long term,” Mr Sharps said.
“This is about the cost of making it to the other side. This means looking carefully at liquidity profiles, maturity dates, balance sheets, and other data points… The more staying power and flexibility firms have, the better. Raising capital now will be expensive.
But investors also need to be on the lookout for more downside risks, including the potential for a second wave of the pandemic in parts of Asia and financial or political stress in Europe. Potential upside possibilities include advancements in drug treatments and progress towards an effective vaccine, but things are still going to get worse before they get better.
“Unemployment claims will spike (tens of millions of people work in industries that are directly impacted by the pandemic), economic statistics will crater, and companies will retract earnings guidance and suspend dividends,” Mr Sharps said.