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They say that the stock markets tend to run ahead of the economy.
Past trends have shown that the stock market has often risen months before an economic recovery and has fallen before a recession.
Thus, with recent strong gains in global stock markets, led by the United States, discussions have erupted over whether the “V-shaped” market rebound tells us that the economy is also headed for a similar recovery soon.
Or is it what some call a “dead cat bounce,” or a short-lived recovery before a steeper drop occurs?
Could the market be underestimating the economic damage of the coronavirus pandemic (Covid-19) and overestimating the speed of recovery?
There does not appear to be any consensus opinion on the recent behavior of the stock markets.
Most economists and analysts prefer to be cautious.
The Covid-9 pandemic has practically shut down global economic activities, as countries enter various forms of blockade to stem the spread of the virus, which to date has infected more than three million people and killed more than 200,000 people worldwide.
With rising unemployment, declining corporate earnings, and increasing numbers of business closings, it is difficult to be optimistic. The world is facing an unprecedented crisis, and no one knows how deep and how long this pain will last.
Greed for fear
Stock markets have suddenly changed their course in recent weeks after suffering a crisis and reaching multi-year lows in mid-March due to the Covid-19 pandemic and the collapse in crude oil prices. For example, the US stock market. The US, measured by the Dow Jones Industrial Average, is up 33% after hitting bottom on March 23. The same applies to the S&P 500 and Nasdaq composite index.
In the UK, the FTSE 100 has risen approximately 18% from its March 23 bottom, while Japan’s Nikkei 225 has gained around 20% after bottoming on March 19.
Back home, the FBM KLCI also rebounded sharply after falling to its multi-year low of 1,207.8 points on March 19.
In what looks like a V-shaped recovery, the benchmark has gained 16.6% to close at 1,407.8 points on Thursday.
However, to date, the FBM KLCI continues to drop 11.4%.
Looking at the efficiency of stock markets in evaluating information on future events, particularly with regard to corporate earnings, the chief economist of Islam Bank, Mohd Afzanizam Abdul Rashid, says that most of the most dire economic news has had a considerable price from mid-March.
“While the data looks really bleak, the equity markets have already valued much of the negative news when it collapsed in mid-March,” Afzanizam told StarBizWeek.
His argument for the case of higher stock prices is now holding back as investors are looking ahead, ready to buy at the first signs of improvement.
“For Malaysia, we have managed to flatten the Covid-19 curve, and we are now gradually restarting our economy after weeks of being under the motion control order (MCO).
“Globally, talks about reopening the economy have also gained traction, as the blockades are eased and governments around the world, along with their central banks, are proactive in prescribing stimulus measures to support the economy, “he explains.
However, Afzanizam notes that intermittent corrections in the stock markets will remain unavoidable in the coming days as economic data releases are expected to show much weakness between April and June, and traders will be tempted to accumulate any gains that have achieved throughout the year. road.
On the sustainability of the current bullish trend in the stock markets, Afzanizam believes it will depend on whether there will be an uncontrolled resurgence in Covid-19 transmissions.
“If that happens, markets could potentially go back to square one or even worse,” he says.
But the way things are, Afzanizam is still pretty bullish on equities.
On the contrary, his house is seeking a range of 1,450 to 1,500 points by the end of 2020 as its base for the FBM KLCI.
A fund manager notes that while the current environment presents the most dangerous time for equity investors, it has also offered the best investment opportunities at attractive prices after the sharp downturn in the market less than two months ago.
“The fear of missing an eventual recovery has lured investors into the market to pick up heavily hit stocks,” he says.
“Many look beyond 2020, who already know that it will be a bad year, instead, they are buying for 2021,” explains the fund’s administrator, who asked to remain anonymous.
Recovery method
Last month, the International Monetary Fund (IMF) predicted that the “Great Blockade” recession in 2020 would be the strongest in nearly a century. The fund also warned that the global economy’s contraction and recovery could be worse than anticipated if Covid-19 was delayed or returned.
In its first World Economic Outlook report since the spread of the virus, the IMF estimated that global gross domestic product (GDP) would drop 3% this year.
That’s a downgrade from its January projection of a 3.3% expansion, and would likely mark the deepest decline since the Great Depression that began in 1929 and lasted until the late 1930s.
The new GDP estimate also dwarfed the 0.1% contraction in 2009 amid the Global Financial Crisis.
However, 2021 appears to be the year of a big rebound for the world economy, with the IMF projecting growth of 5.8%.
For Malaysia in particular, the IMF is seeing a huge 9% growth in GDP in 2021, which is a sharp reversal of its estimated 1.7% contraction for the country’s economy in 2020.
Afzanizam says a V-shaped recovery is possible for the Malaysian economy.
He expects the country’s GDP to be in the red in the first six months of 2020, and even in the third quarter, before recovering in the last quarter of the year.
He points out that the GDP forecast for the Islam Bank base case is a decrease of 1.5% for 2020 and growth of 3.5% for 2021.
However, a more cautious tone is research manager at the Institute for Democracy and Economic Affairs, Lau Zheng Zhou, who sees a U-shaped recovery, which is a slow and gradual rebound, as a more likely case for the economy of Malaysia.
“I think stimulus packages have played an important role in stabilizing the economy. The gradual return to normality for some companies will also provide hope and a sense of political direction for other companies as they adapt and respond to a new market environment, ”says Lau.
“However, much of the country’s growth will also depend on global demand, and our recovery phase is likely to drag on. During the Asian financial crisis, our economy relied on, among others, export as a way to recover quickly , but this might not happen this time, “he explains.
Meanwhile, most countries have already started to see a contraction in GDP in the first quarter.
Bank Negara had previously warned that Malaysia would begin to see the economic impact of the Covid-19 pandemic in the first quarter.
The central bank plans to reveal first-quarter GDP figures on May 13.
Overall, Malaysia’s GDP is expected to shrink, at worst by as much as 2%, or at best to grow to just 0.5% this year.
Painful times
Malaysia is currently in its fourth phase of the MCO, which is expected to end on May 12.
According to Prime Minister Tan Sri Muhyiddin Yassin, Malaysia has been losing around RM2.4bil per day since the MCO was first implemented on March 18 to contain the spread of Covid-19.
To date, the country has lost an estimated total RM63bil due to the MCO, Muhyiddin said in a televised address to the nation yesterday.
He also announced that as of May 4, almost all economic sectors would be allowed to operate, subject to strict guidelines.
While the reopening of the companies is good news, some analysts believe that there is still much uncertainty about where the country’s economy is headed.
“The disruption of certain industries and companies could be much more permanent than we think, and investors may not have all the information to put a price on this,” says Lau.
“It will be interesting to see how long the divergence between the stock market and the economy can be sustained,” he adds.
Meanwhile, devastatingly low oil prices are another blow to Malaysia.
It is estimated that each US $ 1 drop in the price of Brent crude will cause the net oil and gas exporting nation to lose RM300 thousand in oil related tax revenue.
According to the US Energy Information Administration. In the US, Brent crude oil per barrel is expected to average $ 33.04 in 2020, down from $ 64.37 in 2019, before rising to $ 45.62 in 2021.
All this indicates that there are many persistent risks to the country’s economy and stock market.
Government support
At this point, it seems investors are confident that governments will do whatever it takes to stabilize their economies to ensure they emerge from the Covid-19 crisis in a reasonable way, says StashAway Malaysia country manager Sdn Bhd, Wong. Wai Ken.
“The market has recovered from collective news that policymakers have introduced stimulus packages to replace economic output during this period of blockade,” says the former investment banker.
“Globally, governments have collectively announced $ 18 trillion stimulus packages; These initiatives have effectively calmed the markets, “he says.
Wong estimates that how quickly economies can recover from the aftermath of Covid-19 will depend on how effectively governments can implement their stimulus policies.
In the short term, he expects the stock markets to remain volatile, which could negatively react to signs of worsening health.
Similarly, JF Apex Securities chief research officer Lee Chung Cheng says that stock markets in general have responded positively and quickly to government policy actions to support the economy.
“However, investors may be overly optimistic and fail to assess the consequences of the pandemic as there will be a shift in the economic paradigm,” says Lee.
He points out that some companies could disappear permanently, or change their business models after the misery of the pandemic. Furthermore, there will be unintended negative effects of massive quantitative easing (QE) in the medium and long term.
Maintaining a cautious stance, Lee says he does not believe productivity and the economy can fully recover in the next six months after the reopening of the country and world economies.
“The risk reward of buying now is unfavorable compared to a month ago. Therefore, investors are advised to take a cautious stance and only trade in the short term, ”explains Lee.
“We expect the market correction to happen in the second or third quarter,” he adds.
A bounce from a dead cat?
Research from the Hong Leong Investment Bank (HLIB), for example, calls the recent market uptrend as simply a “somersault.”
With the vision of a W-shaped trajectory for the market, the broker expects the FBM KLCI to drop again to a low of around 1,029 to 1,236 points in the coming months before hitting 1,350 at the end of the year.
Its year-end goal values the market at 14.6 times the estimated earnings for mid-2021.
“With this” Covid-19 recession “likely worse than the 2008/09 global financial crisis and almost as bad as the 1997/98 Asian financial crisis, we consider the recent postponement to be short-lived; all of the bear markets in the They have seen “dead cat bounce” ranging from 10% to 13% in the past, “HLIB explains in its recent report.
Malaysia’s GDP is expected to contract 6% this year.
Similarly, Affin Hwang Capital Research believes the worst is not yet over for the local stock market despite the recent strong rally, according to its March 31 report.
The brokerage says: “We believe the market is minimizing the great economic impact of the Covid-19 virus and overestimating a revival of the economy once activity resumes.”
The FBM KLCI is expected to hit bottom at 1,008, based on a price-to-book ratio of one.
Before the market collapsed in mid-March, investors had been paying around 19 times the anticipated earnings for shares in Bursa Malaysia.
The FBM KLCI is currently valued at 15.7 times future earnings, or 1.4 times the price-to-book ratio.
Ultimately, investors will begin to reevaluate how much they are willing to pay for the shares, given the lingering economic risks.
It is then that the resistance of the market will probably be tested again.
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