Release Date: 9th March 2020
“Is this the Disease X of the medical world” and is this the cause of the next global economic shock?”
I am now almost as certain as I could be, that the Global Economic Shock caused by the outbreak of the Covid-19 Virus will lead to a collapse in Global Equities. However, I think there are still a number of different scenarios that can play out in terms of the actual medical impact.
So, this is very much a “Big One” for Global Equities markets and we are just getting started with the falls!
For those still exposed to global equities, my view is to “Keep Selling”
To put my view in more concrete terms, I think the U.S S&P 500 will fall by at least 20% from current levels within a short period of time. This is a view I have with a probability of greater than 80% (which for me is what “as almost as certain as I could be” means)
This view is echoed by economists such as Roubini and a number of other analysts.
While I don’t formally give global equity markets advice, given these are not normal times, and as I have a strong personal view on this, felt it is fair to share this with a select group of clients on an informal basis. My view is that you should NOT buy into the fall seen in global markets. Rather, even at the current lower levels, my recommendation would be to keep selling and raising cash to buy in a bottom that is likely to be much lower than now.
This level of fall in the S&P 500 will have severe knock on impacts on other global equity markets and as a result, on the Sri Lankan equity market. Thus, I repeat the view we put in the Equity Strategy note during the last week of February 2020, which my team sent, where we said “Risks stemming from the presence of the disease are far too high to justify a very high equity position and so, in the current context, we recommend a significant cut down on the allocation to equity and raising your cash allocation to take a more defensive posture in the markets” This advice to sell out of local equities and raise cash remains.
The varied commentary from other local analysts that I see, is far more “local focused” and taking what seems an on the ground “current perspective” on how things are right now being affected by issues overseas and how it might affect things like supply chains and tourism in the next few months.
For me, on the real question, just remains one thing:
Is this the “Big One”?
Not only from a global health point of view, but also from a global economic and financial markets point of view. Given the very immediate focus taken by local commentators, local equities do not appear to have priced in a likely rise in global fears, that this is the “big one”
What I know for now is that there has been an “Outbreak of Uncertainty”
This tweet from a commentator on markets I follow closely mirrors what I think is the underlying biggest issue
“Markets are trading like summer '08 ... then you didn't know who had exposure to RMBS, and you didn't trust what you were told. So, you just got out.
Exactly the same today. We don't know who has exposure and we don't trust what we are told”.
The Summer of 2008 was a time to really sell out of equity markets (even though it had already fallen a lot on fears of Residential Mortgage Backed Securities, which kept falling severely).
There was a much better buying opportunity later on, compared to during the initial stages of the panic in the summer of 2008.
How markets can fall in major economic downturns tends to be underestimated, and the underneath table gives some sense of it.
In global health terms, the question whether this the Big One is still one where there are different scenarios to consider.
While we can have scenarios and a base case and alternative cases for what it will be medically, I have noted that views on what these scenarios are, and their probabilities keep changing rapidly.
This is a great article on scenarios and how we have all become armchair epidemiologists. Read the article here.
If you trust the data, China appears to be showing it can be contained, but it appears that it will require extraordinary actions which carries economic shocks they and the rest of the world would have to deal with.
But whatever the medical scenarios, no one really knows what could transpire and until there is a kind of consensus medical view ( which is positive ) what we remain with is an “Outbreak of uncertainty” and a lack of trust, which is really bad for Equities markets.
With a near certain view that global equities will collapse due to the uncertainty, we recommend you to sell out of equities and raise cash positions.
There will likely be buying opportunity later in Equities, but at much lower levels than now.
Beyond the impact on markets, I found this super letter by Sequoia Capital, which is very useful to think things through.
A distinctive feature of enduring companies is the way their leaders react to moments like these. Your employees are all aware of COVID-19 and are wondering how you will react and what it means for them. False optimism can easily lead you astray and prevent you from making contingency plans or taking bold action. Avoid this trap by being clinically realistic and acting decisively as circumstances change. Demonstrate the leadership your team needs during this stressful time.
Stay healthy, keep your company healthy, and put a dent in the world.