Why I don’t expect a V-shaped recovery
The massive dislocations caused by the coronavirus pandemic are having only a temporary impact on stock markets, which are pricing in a V-shaped income, earnings and economic recovery. But is this optimism warranted? Or will we continue to see businesses negatively impacted for some time to come?
From the February 20 high of 7,162 the ASX 200 is down about 23 per cent. Importantly, however, it is up about 22 per cent from its 23 March lows. In the US, the rally is even more pronounced, having gained 31 per cent from its low point to now being just 13 per cent off its all-time highs.
To better understand whether the rally in share prices is justified, it may be worth examining changes to valuations, what other experts are saying and what is different and similar to past experiences.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
ranvirsingh
:
John Maynard Keynes said “The markets can remain Irrational longer than you can remain Solvent” – I would say this was drawn from his personal experience- which is quite disturbing! A similar thing I remember from the movie “the long short” based on the 2008 crisis- when the protagonist discovered to his shock how the rating agencies & the banks were vehemently protecting their own products in an attempt to delay so that the person looses patience & sells it all- allowing the bank to regain its lost vaue” ! As they say “U should not & can not Fight the Fed” – will the Inevitable happen? – any takers??
Tom R
:
Professor Jeremy Siegel thinks that the US market is now likely to reach an all time high this year.
Fed liquidity and the removal of competition from large businesses due to the lockdown are benefiting the S&P 500.
I am sceptical, but it is amazing to watch the big moves upwards every day at the moment.
Roger Montgomery
:
Indeed Tom. Hard to disagree with the idea that Central Banks and Governments will throw everything it takes, just as they did after the GFC. Could have a ten year bull market again.
Ant
:
I guess the question must be asked…when strong external forces influence the market (like the water in your example), how are value investors supposed to make smart and educated decisions? Buying “A1” companies below intrinsic value is rare at the best of times. This market interference creates an incongruence with value investing .
Roger Montgomery
:
Yes. I think that’s true. It has been evident at least since 2016 and perhaps longer. But we seem to find plenty of individual examples that meet our criteria along the way. Over the last month or so we have been adding the banks to our portfolio and a small group of others. The small cap guys loaded up at the lows on a bunch of companies. It can be done. Patience is key.
Tom R
:
I am cautious Roger, but I do think there is merit to the arguments from Tom Lee of Fundstrat. He argues that experience from the GFC showed that earnings could rise on lower revenues because companies cut costs and became more efficient.
Roger Montgomery
:
I agree. there is room for flexibility and adjustments to my expectations. The massive fiscal and central bank responses during the GFC show what can be achieved by simply throwing money at the problem and kicking the can waaay down the road. That appears to be happening again. For example the cliff in residential construction activity will be met with a government handout to ensure that it doesn’t happen. We go on our merry way. Companies start earning again.