With one of the worst ever quarters in the rear view, markets are pricing in “light at the end of the tunnel”. But that could be a mistake.
Markets are looking through horror employment and GDP data as countries reopen, but the fact that economies can’t be switched on overnight – and the question of whether job losses are permanent – should be giving investors pause.
“The recent rally was a result of an emotional response as the growth in the number of new cases slowed in many countries, as well as an unwinding of investor positions,” said Amundi head of multi-asset Matteo Germano. “Stronger fundamentals are needed for any sustained upward movement in stock prices.”
China may offer a blueprint for how the reopening of countries is likely to proceed. Even as production ramped up, consumer demand remained muted. Job losses and the lingering effects of social distancing are likely to see consumer confidence remain muted for some time, as people avoid crowded restaurants and shopping centres.
“While staples outperformed during the entire outbreak, discretionary consumption goods only managed to partially narrow contractions in March,” said Monica Defend, Amundi global head of research, and Claire Huang, EM macro strategist. “The services sector is lagging behind. High-frequency data shows national passenger flows are still way below their normal levels in April, while catering and accommodation services are picking up slowly.”
“Continuous epidemic prevention could weigh further on the services recovery. As the government remains alert to imported cases and to the risks of a second wave, most entertainment venues across the country remain closed at the time of writing.”
Revelations about the true health of company balance sheets amid the ongoing crisis are also likely to bite investor sentiment as earnings season continues, and the full impact of earnings downgrades and dividend cuts could put an end to the “hope-based” rally in equity markets.