Second Half 2020 Market Outlook: Preparing for a Recovery That Will Not Behave

According to World Meter tracking of coronavirus, the world has passed five million confirmed cases and more than 350,000 deaths.  Treat both figures as a floor, not a ceiling.  Many countries lack the testing infrastructure to capture the true scale of infection, and when expected deaths in several countries are measured against actual excess mortality, the anecdotal evidence points to a death rate running six to seven times above the historical average.  Entire nations are under lockdown, with travel, gathering, and commerce restricted by decree.  The consequences are visible everywhere that matters: balance sheets, share prices, unemployment reports, GDP, and debt-to-GDP ratios.  We are firmly inside a global recession, and most economies are projected to contract for the year. 

The Energy Sector Deserves Its Own Paragraph of Ridicule

Saudi Arabia and Russia chose the middle of a demand collapse to fight a price war, flooding the market with oil nobody wanted at a moment nobody could store it.  Every scrap of available storage filled up, including floating production storage and offloading vessels and supertankers anchored outside major ports with nowhere to go.  The result, on 20^th April 2020, was that West Texas Intermediate futures traded below zero, meaning producers paid buyers to take the oil off their hands.  That is not a market correction.  That is an industry discovering, in real time, that physical commodities do not obey the same rules as a spreadsheet.  Expect further bankruptcy filings across the travel industry, shale oil producers, and the airlines, with debt restructuring becoming the default posture rather than the exception. 

The sovereign risk sitting underneath all this is worse than the corporate headlines suggest.  Nigeria, Colombia, and Venezuela built budgets on oil trading above US$60 a barrel.  Oil is trading in the low-to-mid US$20s.  That gap does not close through optimism.  Even nations with stronger credit ratings, including Malaysia, Brazil, and Saudi Arabia itself, made the same assumption and now face the same arithmetic.  A cascading wave of sovereign debt distress is a realistic scenario, not a tail risk cooked up to sound dramatic.

Equities are Having a Different Conversation with Reality

Stimulus and quantitative easing are doing what they always do: propping up sentiment faster than the underlying economy can justify it.  The United States Government has launched a US$2 trillion stimulus package, the largest relief measure in its history, with the Federal Reserve buying higher-yield government debt to inject liquidity directly into the system.  The Federal Reserve has since slowed its bond purchases, and the Treasury is weighing further debt issuance into a market already close to saturated.  Set the United States aside for a moment, given it is contending with the highest unemployment rate since the 1933 peak of the Great Depression, and the picture across Asia and Europe looks considerably stronger, with a meaningful recovery plausible within six to twelve months.  South America will continue to struggle, held back less by the virus itself than by public policy too lax to contain it. 

Global GDP is expected to fall by roughly 6% in the first half of 2020 alone.  This is a long U-shaped recovery, not a V.  Pre-pandemic output is unlikely to return before mid-2021, and a full recovery may not arrive until 2022.  The glut in bonds keeps interest rates low and credit cheap, but there are not enough businesses positioned to use it productively yet.  This is precisely the moment to lean into selected bonds, since yields will improve as the market rebalances.  Equity markets, for their part, will keep trading on sentiment rather than fundamentals, which is exactly why the market and the economy will feel out of step with each other.  Expect sharp rebounds followed by corrections in step with the opening-and-closing cycle of lockdowns, a pattern that persists until a viable, widely distributed vaccine exists.  Positioning now in light manufacturing and online retail makes sense against that backdrop. 

A Contrarian Note on the United States, Since Consensus is Not Always Correct

Many analysts favour the American market on the strength of its policy response.  I regard that preference as sentiment dressed up as analysis.  The United States' pandemic response has been inadequate, its jobs report remains troubling, and it now has a contentious presidential election to navigate on top of everything else.  I am, in effect, betting against Donald John Trump's administration managing to avoid self-sabotage between now and November.  Asia, excluding Japan, should recover fastest.  It remains the most dynamic region economically, with light manufacturing capacity well placed to meet global demand for personal protective equipment, ventilators, and related medical hardware.  Having been struck first, it is reasonably positioned to recover first as well.

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Terence Nunis | Executive Chairman, Equinox Zenith | Author, The 1% Playbook: The Billionaire Cheat Code