Why this market bounce has got me so perplexed
The 11-year bull market in global equities, which COVID-19 finally brought to an end, came to be derided as the most unloved bull market in history. So, what to make of the strong, and similarly disparaged, bounce since March? Many investors look to be pricing in better times ahead, but media headlines are telling a different story.
Here’s a somewhat incongruous series of headlines we read today.
The first, from The Australian notes that loans deferred because of the coronavirus recession, and amounting to $224 billion from 744,904 mortgagees and businesses, are equivalent to 90 per cent of the capital of the big four banks.
According to The Australian, impaired loan expenses of the big four in the latest financial year totaled $3.7 billion, or an average of 0.33 per cent of loans and advances.
“If the deferred loans were treated as impaired this year rather than deferred, and the big four’s share of them was the same as their 80 per cent share of total loans and advances – probably a safe assumption – impaired loan expense would be 16.6 per cent of their loans and advances and would more or less wipe out their capital.”
Obviously, most of these mortgages should be OK, but there’s a significant difference between 95 per cent “OK” and 90 per cent “OK” (or any other level for that matter). What it does highlight is the extreme level of uncertainty here – especially as assistance programs such as JobKeeper are wound back.
In the past we have seen the Government, the RBA, APRA and the banks conspire very hard to keep the property market from crashing – remember when they redefined a “new loan” so that thousands on interest-only mortgages weren’t forced onto P&I loans(?) – so you can be sure all stops will be pulled to ensure the financial system isn’t at risk. But does that mean equity holders will be protected?
According to the Financial Times, “Emerging and developing economies will shrink this year for the first time in at least six decades, according to the World Bank, underscoring the mounting economic toll from the coronavirus pandemic as it spreads across the world.
“The bank’s forecast is that as many as 100 million people in the developing world will be tipped into extreme poverty by a projected 2.5 per cent contraction in emerging markets’ gross domestic product, with incomes per capita set to shrink 3.6 per cent globally. The bank defines extreme poverty as an income of less than $1.90 a day.”
In a foreboding sign for Scott Morrison’s JobKeeper program, the Financial Times has also noted that France’s ‘temporary unemployment’ scheme to avert mass bankruptcies and lay-offs as a result of the coronavirus crisis will be extended, and is now expected to last up to two years, the country’s labour minister said.
“The biggest European economies, including Germany, the UK, France, Italy and Spain, rolled out or enhanced such schemes when the pandemic triggered lockdowns across the continent that sharply reduced economic activity and made it impossible for millions of workers to do their jobs.
“Muriel Pénicaud, the labour minister, said that at the end of April some 8.6 million employees were benefiting from the French scheme, under which the state pays subsidies to companies to fund the salaries of those prevented from working.
“We are going to put in place a long-term partial-activity scheme,” Ms Pénicaud told Franceinfo radio, “through which employees could have fewer working hours and be partly supported by the state.” The scheme “is likely to last a year or two,” she added.
In China, with Xi Jinping unable to point to a thriving domestic economy to secure the legitimacy of his fascist dictatorship, he will increasingly have to fire up his nationalistic rhetoric and propaganda that will then need to be followed by action (think recent activity in Hong Kong, Taiwan, and on the border with India).
The AFR reports a new global crisis is looming in east Asia, noting “There is growing concern about Beijing’s behaviour, not just in Washington but in Delhi, London, Tokyo and Canberra.”
And here are the slightly incongruous headlines:
“ASX up over 2pc as banks extend recovery rally” – The Australian Financial Review
“S&P 500 wipes out 2020 loss with a historic rally” – Bloomberg
“Nasdaq hits record close, confirms bull market” – The Australian Financial Review
“Stock markets turn positive for the year” ” – The New York Times