Interesting to contemplate that last week the “Nikkei 225 experienced its biggest weekly gain since 1950 and the weekly rise in Dow being the fastest since the 1930s” according to analysts from SocGen . That said the markets are still down 30% from highs. My finger in the air estimate would be that we won’t see a bottom until we see that peak to trough hit 45%, but, again, what do I know.

On paper what should happen next is determined largely by how/whether earnings and dividends rebound. Remember that the stock market is one great weighing machine with cashflows the main, though not only, input. But forecasting is a mug’s game at this point in the cycle. Really, best to admit that it is a finger in the air exercise and nothing more, especially if governments start insisting on retaining cashflow as a precondition for aid. Nevertheless, analysts are trying, valiantly, to run estimates.

SG, for instance, reports “that whilst a third of the European companies SG covers have withdrawn or modified their 2020 guidance, two-thirds have yet to change guidance, so requiring analysts to make assumptions about the likely impact”

Crucially it sounds like they’ve started ignoring out of date consensus numbers and focused instead on estimates posted during the past 20 days (so-called flash estimates).

“Globally, instead of Year 1 forecasts cut by 9.2%, so far this year, the flash estimate shows a 17.2% cut, a massive 800bp difference moving the Global 2020 P/E we calculate using the standard consensus from 14.6x to 16.1x. That’s a fully valued market in normal times, let alone a crisis!”.

My guess is that these numbers on earnings are still too generous and we could see even sharper downgrades as the full horror of what’s happened emerges.

Still it is not all bad news.

Analysts at Deutsche’s US markets operation report that market volatility is at long last dying down…a bit. They observe that intra-day ranges have been moderating and have fallen in the last few days to a 3 week low, “albeit to levels that remain very high by historical standards. Likewise, realized intra-day equity vol (measured over 5 min intervals) has also been declining steadily over the last week. A moderation in volatility is an important precondition for investors to raise equity exposures, as it is a critical input into risk management models for both systematic strategies and discretionary investors”.

But even if volatility does moderate, who’s going to be the buyers? The bad news is according to Deutsche analysts household sector allocations to equities still remain well above the lows of the last two recessions and “suggest the potential for incremental selling”. And big pension funds ? They’ve plunged to near the bottom of their 25-year range, while bond allocations are near the top. But that might be a portent of better news – according to Deutsche “historically, pension fund rebalancing into equities has had a positive but mild impact on performance. Indeed, even with bond-equity performance differentials as large as seen this month, historical sensitivities point to only a modest 3% rally in equities in the last week of the month. However, with liquidity remaining extremely low, the additional flow could have a more significant impact than is usual”.

Watching India

One last, sour note.

I’m increasingly concerned that the developed world is falling into its usual myopia, panicking about events in our immediate locality – and amongst fellow English speakers – and ignoring much bigger moves in the developing world. India is rightly concerned by this virus and local health researchers reckoned that a million people in India could be infected with the coronavirus by mid-May if a lockdown and social distancing was not introduced immediately. My guess is that that might be a woeful underestimate ( i sincerely hope not though) and that the lockdown might only mitigate some of the damage.

A note from Indian independent research house Lalcap lays out the core concerns this morning, and helps explain why I’ve turned very bearish short term on emerging markets:

“Despite the lockdown imposed from 25 March India sadly still has the potential to have the highest numbers, officially or unofficially, of infections and deaths globally due to Covid-19. This is because it has the ingredients for a perfect storm created by the coronavirus. These include a huge population which lives densely and hence makes social distancing challenging, an inadequate healthcare system and an existential threat of transmission of the virus to rural India where 70% of the population lives;

There has been severe dislocation of people following the overnight lockdown with inadequate planning and notice. People affected range from foreign nationals stuck in India, some in dire conditions, to local jobless migrant workers fleeing cities and towns to return home to rural villages – but with no transport available in many cases;

For India’s estimated 120 million migrant labourers, the shutdown is a deep crisis, as wages come to an abrupt halt and many cannot afford the rent or even food in the cities”.