27 March - updates from our investment partners
- 27th March 2020
The latest update from one of our trusted investment partners
What has happened
The ECB helped continue the three-day streak for US equity gains by announcing that it wouldn’t apply the normal cap of ‘only’ buying one third of a Eurozone nation’s outstanding debt when it comes to the pandemic relief programme. This ironically enabled the EU council to do precisely nothing when it came to co-ordinated fiscal support. It is the classic Eurozone problem yet again - the more the ECB does the less the political will do act at a government level on fiscal spend. Any expectation that the German €750bn package was the start of a more sustained series of Eurozone fiscal stimulus seems premature.
How is the data reacting
Yesterday saw of the first coronavirus impacted data releases from the US, Weekly Jobless Claims. The weekly print showed 3.28 million people filing for unemployment benefit, a gigantic surge of 3 million over the last data release. To give you context to this number, the worst week prior to this was 695,000 back in 1982. This tells you two things, one how sharp the recession may be in Q2 but also how quickly all of this has occurred. During the financial crisis it took around 200 days for the MSCI USA to dip into bear market territory, by contrast coronavirus took a mere 20 days. Whilst these US numbers are clearly dramatic, the market was expecting some abysmal numbers and therefore these poor near term figures are being looked through as investors focus on the market’s future prospects.
What does Brooks Macdonald think
When calculating the fair value for a company, investors use a discount model to find the price. This means that earnings now are worth more than earnings in 5 years as the 5-year number has a higher ‘discount’ to compensate for the increased uncertainty over that time horizon. This discount is in part driven by government bond yields which are used as a proxy for ‘risk free’ money. Because government yields are so low, the equity market inherently becomes more patient as the discount rate is lower. This means that with sentiment marginally more buoyant in the last few days, markets are willing to look through one or two quarters of poor data as the opportunity cost of waiting is so low. We often refer to the relative valuations of equities and bonds and the above financial theory is one of the reasons why it is a reliable indicator over the longer term, if the cost of waiting is low then the growth story of equities is far more attractive.
60 second update from Edward Park:
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