Global stock markets sank despite a plethora of measures by policy makers worldwide to cushion the economic effects caused by the novel coronavirus. The Dow Jones experienced losses not seen since the 1980s, while the Johannesburg Stock Exchange tumbled 29% last week. Currency markets were also volatile as investors piled into the US dollar. The coronavirus pandemic has wiped off near a third of the global market cap in just a week. In the US, the market is clearly moving into a base case of a recession. In South Africa, President Cyril Ramaphosa is aware the coronavirus pandemic would have a “significant and potentially lasting impact on our economy”, with exports and tourist arrivals declining. According to the Big Four accounting firms, R200m and 1,000 jobs will be lost because of the effects of the coronavirus. What should investors do now? Longer-term investors may want to consider adding to equity risk. Mike Wilson, chief US equity strategist and chief investment officer for Morgan Stanley shares his views on the current global market rout. – Stanley Karombo
By Thulasizwe Sithole
The US government is proposing a $1trn Coronavirus stimulus package, while the Fed has announced a $700bn quantitative easing programme to inject capital into the market. Notwithstanding all the measures, the economy many believe is heading for a recession.
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The fallout from the Covid-19 and the oil price war have “understandably” battered equity markets, said Mike Wilson, chief US equity strategist and chief investment officer for Morgan Stanley.
He said, while MS is not suggesting investors go on a buying spree, markets are now trading slightly below its downside case on the S&P 500. “Given the accelerated move lower, we believe that longer-term investors might start to consider adding to equity risk.”
The end of the cyclical bull market was likely accentuated by liquidity-induced froth, as the Fed expanded its balance sheet last year. This liquidity, alongside economic green shoots and low volatility, invited more risk-taking and leverage from most corners of the market, Wilson said.
“The past few weeks have helped reduce this leverage, but the obvious signs of funding stress that began in the third quarter, 2019, always made investing based on another round of quantitative easing a much riskier proposition for market participants”.
Wilson believes the 2,750-point mark may be a reasonable year-end bear case for the S&P. He predicts that should the US dip into a recession, it would likely be short-lived and policy responses could help stabilise and even accelerate growth from the a trough in the second and third quarter.
“For the S&P to end the year at around 2,750 would imply lingering issues beyond a garden variety recession that currently seem unlikely,” he said.
According to Wilson, liquidity-driven overshoots can work in both directions. “We overshot our bull case to start the year, amid abundant liquidity and absent near-term risks. Now, we’re overshooting again, but on the downside, given a lack of buyer appetite to make a market and extreme uncertainty around what this outbreak really means.”
He said MS has been watching 2,550-2,600 as a level for the S&P in an overshoot – a level the S&P has already traded below. “To the extent that volatility and uncertainty limit buyer appetite, further investor reductions in gross exposure could push the liquidity-driven overshoot further than we expected. However, for investors with a 6-12-month horizon, the 2,550-2,600 level may offer an attractive risk-reward buying opportunity. We are also encouraged by the fact that 10-year Treasury yields are not making new lows which can signal an investor flight from stocks.”
Wilson said given the accelerated market move lower, “we also wouldn’t be surprised by earlier-than-expected exit rotations”.
“By the time jobless claims spike, or the National Bureau of Economic Research officially declares that the recession has started, it will be too late to make the rotations that outperform the market’s trough.
“We aren’t suggesting that investors begin to add positions to early rebounding sectors, such as Discretionary, but that moment may be closer than some investors expect. Equity (and bond) markets have been discounting this environment for some time, which leads us to believe that we are now at a very good entry point for many stocks, including several of the major indices, such as the S&P 500,” Wilson said.
