We are usually an upbeat bunch in our monthly communications to clients, but under the current circumstances, it may seem challenging to look for the silver linings. The coronavirus has brought and will continue to bring much destruction to economies, supply chains and financials markets, as investors scramble to liquidate risky assets in favour of safe havens, such as gold, the dollar, and toilet paper.
But corona memes aside, it is time to batten down the hatches as we move through the likely trough in markets during the next few months. As always, point forecasting is difficult, and scenario analyses are more relevant because no one can say for sure how and when the pandemic will end.
Central Banks are going all in with the Fed back at the zero lower bound, while the open-ended quantitative easing will be the norm in the US and Europe in the coming years. While investors bemoaned the unfair burden on monetary authorities, the pandemic is the trigger to jolt governments into action – the US is set to inject up to US$2 trillion while the uber-conservative German finance ministry will move the budget into deficit to stem the impact on its economy.
In doing your 2020 planning who thought the ALSI would have a single-digit PE ratio and the R186 would trade with a 10%-handle. Clearly all bets are off, but all policy options are on the table. Is this a permanent revaluation or an attractive buying opportunity? We think the latter, but note that ongoing caution is warranted as new information comes in.
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