As I wade through the much diminished (compared to recent weeks) flow of stories and research notes after the Easter weekend break one observation stands out for me.
It’s from Rachel Winter, an associate investment director at UK firm Killik & Co. She’s been looking at numbers for the MSCI World Index through to yesterday (Monday) when the index closed at 1956.75. Her discovery ? This benchmark index was now “19.6% below its all-time high, and that means that at the moment we are no longer in a bear market. This really highlights just how much markets have recovered from the lows it hit towards the end of March. The MSCI World is actually up 22% since then. “
Yep, bear market, RIP!! Not.
The rebound has been so dramatic that we are now officially out of a bear market and back into something approaching a normal market. I’m utterly unconvinced by this development and think that we still face many subsequent aftershocks or waves of disruption, but that’s my personal, more bearish, view. It’s the subject of my FT column online tomorrow.
What is less debatable is that the US market in particular has staged a truly epic massive defensive rally of mammoth proportions although it is interesting to dig around to see exactly what has rallied.
According to analysts at SocGen the rally has involved various “sporadic spurts of mini rallies in Value [style stocks] while the weight of economic uncertainty has been too heavy to sustain a rebound. Given its historically low valuation and conducive macro-economic foreground, we project an historic rally in Value at the tail-end of the downturn, once the economic stimulus begins to ignite the desired recovery. “
And my guess is that we’re not even remotely near that point yet. So classic value might have to wait a tad longer me thinks. And more on that later.
So what’s been pushing indices so much higher?
Analysts at Deutsche have also been digging around in the data dumps, this time in funds flow data and their findings are startling. Their first point is perhaps the most obvious. Any proper rally needs a decline in volatility and the scene was set up two weeks ago for this. Daily ranges have plateaued since, while volatility, both implied and realized, has continued to decline. That said, it’s worth noting that liquidity however remains stuck at record lows despite the strong bounce in equities.
Nevertheless, funds flow data reveals big moves into equities (+18.4bn), the strongest in six months, following robust inflows in the prior week as well (+$8.1bn) [my emphasis added]. US equities (+$14.4bn) were the biggest beneficiary but Europe (+$1.0bn) and Japan (+$3.3bn) also saw inflows.
And losers? EM equities (-$1.4bn) and Bonds (-$1.1bn) although money has flooded into high yield funds (+$4.1bn) and investment grade bonds. Money market funds also continued to see large inflows and scaled by GDP or personal income, assets in these funds are now approaching past recession highs [again my emphasis].
Investors might like to fool themselves into thinking that this all about anticipating the end of the Covid scare but, as I have repeatedly said, I think is an example of hope triumphing over horrible reality. I’ll return to that subject shortly.
Buzz, your time has come
I also think that perhaps the most powerful driver is what analysts at research firm Cross Border Capital now call “QEInfinity”. Buzz Lightyear, your time has come as a central banker.
Cross Border’s measure of liquidity (the GLI) has jumped to 76.9 (range 0-100) in March, with Global Liquidity surging by 40% this year, reaching 200% of World GDP. The US Fed has led the charge, with it’s balance sheet up by one-third already. The only mystery to date – answered perhaps by a recent note from Michael Pettis – is “why China is not easing. The People’s Bank has injected virtually no new funds through end-March. What a contrast to the US Fed!”.
For me the most realistic analysis comes from a biotech analyst at Morgan Stanley, Matthew Harrison, which is worth quoting from at length. Harrison tries to look beyond the peak and see what might happen in the all important US market. His core concern is that US outbreak is far from over.
“Recovering from this acute period in the outbreak is just the beginning and not the end. We believe the path to re-opening the economy is going to be long. It will require turning on and off various forms of social distancing and will only come to an end when vaccines are available, in the spring of 2021 at the earliest”.
This caution is built on an exercise where Harrison and his team ran a state level a state-level model for the US “which suggests it is likely to face a multiphasic peak. In particular, we expect the coastal regions, led by New York, to peak – defined as a sustained decline in new daily cases – over the next 3-5 days. However, we expect the rest of the country to follow slowly, trailing the coasts by around three weeks. While this “second” peak is unlikely to be as severe as the first (~10,000-15,000 daily new cases versus 30,000-35,000 in the first peak), it means the US outbreak will have a very long tail. This much longer tail would put the US time to peak at ~4x China and 2x Italy, driven by the slow uptake of social distancing measures and lack of robust testing (New York, with the highest testing ratio in the US, is still testing at a per capita rate just half that of South Korea’s most impacted city Daegu). This would put an initial US re-opening on track for mid-to-late May at the earliest”.
Harrison reminds us that come late summer or Autumn we still won’t see a “normal reopening”. That can’t happen until we see a number of steps fulfilled:
(1) adequate surge capacity in hospitals,
(2) broad public health infrastructure to support testing for disease surveillance,
(3) robust contact tracing to curtail “hot spots” and
(4) widespread availability of serology testing (blood tests to see who is already immune to the virus) can the US confidently return to work.
“We see this happening in waves starting in mid-summer. “. I’d also add that that that timescale probably also fits with the UK, although we might be a month or two ahead of the US on some of these measures.
And when we -re-open, what will ‘normal’ look like?
“Unfortunately, we think there will still be a large number of workers not able to go back to work until a vaccine is abundantly available as social distancing cannot be fully relaxed until we have herd immunity (~60% of people vaccinated). Furthermore, large venues such as sports stadiums, concert halls and theme parks are also likely to remain shut or have attendance capped at 10-25% of prior levels. This view on the delayed peak and slow return to work has led our US economists to revise their US forecast to a return to pre-COVID-19 levels not until 4Q21”.
In truth, only a vaccine will a proper solution to this pandemic and that needs to be sped up by government’s investing “in large-scale vaccine manufacturing prior to successful results for all viable candidates despite some not making it to market. Only by building production capacity now can governments provide the billions of vaccine doses we need to meet demand for the 2021 season”.