02nd Half 2020 Market Outlook: Preparing for a Post-Pandemic Economy

According to World Meter tracking of coronavirus, we have passed 5 million cases of the infection, with over 350,000 death.  Even then, we know these numbers are massively under-reported since many countries do not have the means to test much of their population.  When we consider the expected deaths of select countries against actual deaths, we have anecdotal evidence that the death rate is as much as six or seven times above the historical average.

Entire nations and regions are in various forms of lockdown, with restrictions on travel, gathering and businesses.  This affects economic activities, and this is reflected in the balance sheets, the stock prices, and other indicators of economic strength, such unemployment reports, GDP, and debt to GDP.  We are very much amidst a global recession, with many economies projected to contract for the year.

This economic slowdown on a massive scale has had a severe impact on several industries more than others.  For example, oil wells were still pumping, partly due to the ill-timed spat between Saudi Arabia and Russia, leading to massive over-supply.  This glut took up all available storage space, including FPSOs, and super tankers anchored at major ports.  This affected the rollover of oil futures and options, leading to negative prices.

There have been major bankruptcy filings in the travel industry, the shale oil industry, and among airlines, leading to restructuring of debt.  We should expect there to be more such filings for creditor protection,  Of greater concern would be the default of sovereign bonds of petro-economies, such as Nigeria, Colombia and Venezuela.  Even countries with better credit ratings such as Malaysia, Brazil and Saudi Arabia are to be viewed with concern.  All these nations enacted budgets predicated on oil trading at US$60 and above.  Oil is trading at the low to mid US$20s per barrel.  We should expect a cascading sovereign debt default, shaking the market.

On a brighter note, we expect equities to recover as stimulus measure and quantitative easing in major markets take effect and put some optimism in the market.  The Federal Reserve has slowed down their bond buyback, while the Treasury is considering issuing new debt, but the market is largely saturated.  The US Government itself launched a US$2 trillion stimulus package, the biggest relief package in its history where Fed bought government debt of higher yield, injecting liquidity into the market.

Putting aside the US, which still has to contend with the highest unemployment rate since the Great Depression peak of 1933, I expect a strong economic recovery to begin in the next 6 to 12 months, particularly in Asia and Europe.  South America will still be buffeted by their inability to stem the pandemic due to lax public policy.

By the end of June, global GDP is expected to drop by 6% in the first half of 2020.  We are looking at a long U recover, meaning that we are looking at mid-2021, at the earliest, before the economy returns to pre-pandemic levels.  It may well be 2022 before we see a full recovery.  The glut in bonds means that interest rates will remain low, with plenty of cheap credit available, but not enough businesses to take full advantage.  Now would be a good time to lean heavily into select bonds because their yield will increase in time as the market balances out.

In general, market sentiment will drive the increase in equities, which is why the market is out of sync with the economy.  There will be periods of strong rebound followed by correction as we go through cycles of opening up and lockdown with the waves of new infections.  This will likely continue until we have a viable, widely available vaccine.  Now is a good time to take up position in counters we expect growth in, such as light manufacturing and online retail.

Whilst a lot of analysts advocate a strong preference for the US market due to the strong policy response, I feel that this is dictated by sentiment.  I expect the US to lag behind the EU and Asia in recovery because their pandemic response is inadequate, the jobs report is concerning, and the we have to contend with a contentious American presidential elections.  I am betting on Donald John Trump’s administration self-sabotaging.

Asia, excluding Japan, is expected to recover the quickest.  It is still the most dynamic region, with a lot of light manufacturing in place to take advantage of the need for PPEs, ventilators, and associated equipment.  As the first region hit, it is also expected to be the first region to recover.