The verdict is that we’re slowly moving towards normality. Yet everyone has their scepticism. Have we hit the bottom? Is the market heading towards another correction? Is this rally too good to be true? Considering how unpredictable the global future is, there must be a method of monitoring the route back to everyday life.
With this in mind, I reached out to two leading fund managers and asked them what the most important trend, theme or piece of data is that investors should keep a close eye on as the world moves out of lockdown. Responses from Kirsty Desson, Aberdeen Standard Investments and Ned Bell, Bell Asset Management.
The consumer recession
Ned Bell, Bell Asset Management
The two most important data points to watch would be U.S. unemployment and earnings revisions for 2020 & 2021 for the MSCI World Index.
Perhaps more than anything, the COVID-19 crisis has been a ‘consumer recession’. Not only have consumers been in varying degrees of lockdown – and therefore not been in a position to spend – but the economic hit has been massive and resulted in ~38 million people in the U.S. losing their jobs in a very short period of time.
One of the biggest unknowns at this point is around the re-opening of the economy. If the states re-open too quickly, there is obviously a risk that we see a second wave of COVID-19 and head back into lockdown. This scenario clearly isn’t priced into markets at the moment and if anything, they are pricing in a seamless reopening.
As far as earnings estimates are concerned, we have seen the current year EPS estimates for the MSCI World Index downgraded by 33% YTD – most of which has come since early March. Against the backdrop of the COVID-19 crisis, such a sharp earnings contraction is hardly a surprise. However, as we look a little further ahead, the 2021 EPS estimates for the market look heroic – implying that 2021 EPS will be 21% higher than 2019 EPS. This disconnect arguably poses the biggest risk to a sustained recovery in equity markets from current levels.
Spending is key
Kirsty Desson, Aberdeen Standard Investments
The key data to watch is around government stimulus and the rate of unemployment shrinkage. The shutdown has been well documented and the market understands the shock that coronavirus response measures have dealt to supply. Companies have had the chance to report quarterly earnings and, where possible, to give forward guidance on earnings. Now we have entered a phase in which a number of countries are reopening their economies. In China – understood as the source of the outbreak – economic activity has returned close to pre-pandemic levels in certain areas.
The key question now revolves around the amount of damage done to the demand side of the equation. The origin of this potential impairment is two-fold. Firstly, policymakers worldwide successfully convinced the public to stay at home to prevent further spread of the virus. To revive consumer spending now they need to reverse this public messaging. People need to know that it is safe to return to school, work, shopping, restaurants and other places where they have physical interaction with other people. The rate at which business activity resumes, therefore, is more likely to be dictated by consumers than suppliers. But consumer confidence will take time to rebuild. Steady progress towards a reliable, mass-produced vaccine could accelerate the return to ‘normalisation’.
Secondly, a graver issue is the impact on income levels. Millions of consumers around the globe have been deprived of income. Millions have lost their jobs, and many more currently on government support schemes may still lose theirs. The recessionary blow from rising unemployment is likely to last longer than the temporary hit from the virus itself. Consequently, governments must now shift focus from shoring up economies to stimulating them to create employment. Spending will only rise when employment improves.
It’s clear that no matter what trend investors observe, the future is unpredictable. However, monitoring global unemployment levels is key in knowing when the volatility will calm. Both Kirsty and Ned can agree that employment will act with a ripple effect, consequently creating consumer demand and economic growth. They also agree that the world will return to normality, and unemployment shrinkage is the most important trend that investors should watch as global lockdowns ease.
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