Financial markets are signalling a narrative that is “detached” from the slow economic recovery, and investors should be bracing for prolonged weakness.
While China’s economy is now slowly reopening, retail sales are still poor as households grapple with their finances and people avoid shopping due to fear of catching the coronavirus. That’s an omen for the global recovery, says Principal Global Investors chief strategist Seema Shah, who believes that investors aren’t pricing in a slower than expected return to “business as usual”.
“This should provide some insights for the rest of the world: reopening will be hard,” said Ms Shah. “Any return of daily routine and economic activity will take time, a prospect reinforced by secondary waves of infection now cropping up in parts of Asia.”
“Investors should, therefore, brace themselves for prolonged economic weakness. Although governments are looking to lift lockdowns, the reopening of economies will be only gradual, compounding financial strains for businesses and households.”
While monetary authorities have signalled that they will continue to stabilise markets – most notably the Federal Reserve, which has essentially pledged unlimited quantitative easing – that will do little for the sections of the real economy most impacted by the coronavirus or prevent cautious consumer behaviour.
And although Ms Shah believes that markets might have seen the bottom after a trough in March, they’re still extremely positive – with little reason.
“With financial markets signalling a narrative that appears to be very detached from the likely jilted and slow economic recovery, equities are likely to retrace some of their recent gains,” Ms Shah said. “At least investors can take comfort from the fact that the worst of the pandemic is likely behind us, the market bottoming process is underway, and with markets typically leading the economy, we are – plausibly – clear of the market lows.”
deVere CEO Nigel Green has voiced similar concerns, saying that investors weren’t pricing in a potential second wave of coronavirus infections while ignoring headwinds like the upcoming US presidential election and the possibility of a “no-deal” Brexit.
“It would appear that the financial markets are oblivious to the obvious and serious financial threat of a potential second wave of the coronavirus,” Mr Green said. “Alarmingly, this does not seem to have been priced in.”
“The markets’ bullish sentiment during this mass disruption and dislocation would be baffling enough, but there are also other headwinds on the horizon.