Under more “normal” circumstances, we’d all be talking about the economic recovery by now, with follow-on consequences for government policies, central bank focus and a decisive switch in momentum for specific segments of the share market.

But these are not, by anyone’s standards, “normal” times.

Irrespectively, if we observe price action for global equities over the past six or seven weeks, combined with forecasts and market commentaries from experts and global strategists, there is unmistakably a preference building for cyclicals and cheaply priced laggards in search of the next engine for outperformance and outsized returns.

The face value reasoning behind this anticipated switch in market momentum is built on two pillars:

  1. Pandemic “winners” and new era technology have become a crowded trade (everyone is in on it)
  2. The ‘value’ part of the share market is too cheaply priced, in particular on a relative comparison

So, what will shift momentum out of winners and into the laggards?


A recent market report by Macquarie emphasised that, when economies recover from the depths of an economic recession, it is always the turn for cyclicals to shine, because of their leverage to improving economic dynamics, and the return of “growth”.

For anyone who understands how investing works, and how financial markets operate in relationship to the real world out there, such a summary contains nil surprise.

One of the attractions of cyclicals and more vulnerable business models is that, by the time the economy starts picking up, their share prices have been clobbered to pulp in response to the preceding fall-of-a-cliff downturn.

The combination of extremely cheap share prices with improving prospects for growth is an enormously powerful, and attractive, proposition for investors looking over the horizon.

Most deep and gut-wrenching bear markets occur in combination with an economic recession; hence every recovery out of those bear markets has been led by banks, miners, energy companies and small caps.

But what caught my attention in Macquarie’s report was the -apparent- requirement to underpin the case that the above straightforward order of events still applies.

Analysts at Macquarie had gone back in time and isolated four major economic recessions. And every time the pattern coming out of each of these four recessions has been similar, they emphasised; no exception.

Why, I wonder, why is it that Macquarie’s analysis of past patterns post economic recessions needs to be supported with extra-details and emphasis?

Is it because today’s investors do not understand the correlation between economic recessions and how the subsequent recoveries benefit different types of companies than the ones who outperform when confronting the recession head-on?

Or is it because investors have so much fallen in love with highly valued, outperforming, modern era technology companies, they simply cannot focus on anything else but those beloved ones?

Or is it maybe because there remains a healthy dose of market scepticism about the exact shape (speed) of the economic recovery that as yet hasn’t announced itself yet, other than the initial bounce from the absolute bottom?

It’s probably a combination of all of the above.


One starts to realise financial markets are not necessarily what they appear to be at face value when strategists at Morgan Stanley -reported proponents of the V-shaped recovery scenario- feel the need to explain to their clientele that V-shaped recovery actually doesn’t look like a genuine V.

Morgan Stanley’s V looks a lot more like the Nike logo -the swoosh- with a much more elongated, drawn-out right-hand part after the bounce from the bottom.

It just so happens to be, this is the most preferred forecast by analysts and strategists on Wall Street.

Where the discrepancy kicks in is through the anticipated response by investors and by financial assets.

Morgan Stanley thinks the prospect of economic recovery, though not as strong as, say, post GFC, will make investor focus switch to companies benefiting from the improvement, even if it is not as strong as hoped/precedents/forecast.

Morgan Stanley also believes that, in combination with unprecedented central bank liquidity and significant government stimulus measures, the forthcoming economic recovery will create price inflation and force bond yields (long end) higher.

If correct, such a confluence of factors has the potential to create a strong self-perpetuating switch out of this year’s winners and into the laggards and the cyclicals, led by banks and energy and mining stocks.

Clearly, there is still a lot of scepticism surrounding the so-called “reflation” trade as all attempts to ignite this major switch have been nothing but largely unsuccessful since late August.

Sure, frothy valuations here and there inside the technology sector have deflated somewhat, but that was always bound to happen at some stage, and banks have finally moved off their price bottoms, but Telstra hasn’t, and QBE Insurance still looks “sick”; same for Nufarm, IOOF Holdings, not to mention Unibail-Rodamco-Westfield.

On the other hand, share prices for Ardent Leisure ((ALG)), SeaLink Travel Group ((SLK)) and Event Hospitality and Entertainment ((EVT)) have started to move strongly upwards.

All in all, the past six-seven weeks have created a lot of volatility, without a clear, lasting or dominating pattern in share markets, making the month of September, above all, a rather messy affair.

Incidentally, if you are worried about the second wave in the global pandemic impacting on economies and companies, as is the global strategy team at Citi, you’d be avoiding cyclicals as they remain most vulnerable to set-backs.


Maybe the simplest way to put a rocket under the Big Portfolio Switch in global equity markets is through the successful development of a vaccine that allows humanity to revert back to life as we all knew it pre-2020.

Sure, financial markets would soon come to realise developing a vaccine is one thing, and sharing it with billions of people worldwide is quite another, but the sheer prospect of beating the virus and being able to move on seems like a guaranteed path to keep investor hopes and anticipation elevated for a prolonged time.

Which is why the likes of Morgan Stanley have their team of healthcare specialists operating on constant alert for just about anything that can generate positive newsflow regarding covid-19 and a potential vaccine.

According to that team’s most recent updates, the expectation remains that one of the leading contenders in this global race can start Phase III trial preparations by November and have a potential vaccine ready by late March-April next year.

This means the outcome of the US presidential election might not even be the most important news event in November. At least for the short term.

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Mark Dawson

Nicely written thanks Rudi

Chris Gilbert

Thanks for your view. I believe that most of the current analysis of past recessions is faulty. Past recessions have occurred when some financial fault line has had an earthquake and threatened the financial institutions, or extremely high valuations caused a rush for the door type correction. This recession is a unique once in a 100 year type recession cause by something that is totally external to the financial or market systems; a pandemic or a recession caused by nature declaring war on humans. Total recovery is not fixing the financial system but successfully getting and and administrating a vaccine. Without that, the economy will not have a V recovery. Currently there is a huge disconnect between the the economies and the markets due mainly to the enormous increase in Money Supply which needs to find a 'home'. How this will be resolved is still very debatable. Chris Gilbert

Rudi Filapek-Vandyck

Mark, thanks. Always great to feel appreciated;)

Rudi Filapek-Vandyck

Dear Chris, thanks for your comments. I don't think your questions and thoughts and what is being expressed in my story are sharply different. Exactly because this year's recession and recovery are different from past experiences, is why the title refers to a "messy affair" - very different from the experience in 2009 when everything cyclical and financial became an instant buy and kept on rallying for a number of months. And your vaccine makes an appearance near the end. Cheers, Rudi