Below information is a summary of events and our house view from one of our investment committee members Andrea Ciaccio, Portfolio Manager AZ Sestante:
- The US has changed its narrative and is taking the risk of opening its economy on a set date. This has settled the market somewhat and provided certainty. However, time will tell if this strategy works.
- The US has already discounted a recession in its market valuations and Europe has seen a rebound. Valuations in Europe are discounting a full-blown recession, worse than expected in the US.
- Volatility is still extreme with equity markets signalling potential movements of up to +/-6-7% every day. However, valuations are getting interesting given significant damage has already been done. The market will trade based on the fact it is already expecting very bad numbers.
Furthermore, on volatility, with a VIX above 30, it is difficult to allocate money. Even when the market rallies volatility can still remain high. One can take the view that it is stabilising – we can work with a VIX staying at 30 for 6 months – or one can panic as we saw last week when investors shorted the market to protect themselves at the very worst moment. They then had a significant short squeeze when the market (unexpectedly?) went higher.
Is the global response enough?
We think it is better than in 2008:
- The sheer quantum of the numbers is staggering.
- There will be consequences over time – inflation etc; but
- what is different to GFC is that the real economy is the issue, not the financial economy i.e. stabilising Main Street is the key goal.
If Main Street reopens and people can go back to work in a staggered fashion whilst protecting/isolating those most at risk, it will be a short recession and it will be very deep but it will be short and it will work.
The response in finance so far has been big and quick, but we have to follow suit in the real economy. The narrative seems to be pushing in that direction, but governments will have to balance the economic damage with health damage.
