The first question, however, is actually a far better question. This is because a statement on the future direction of travel for equity markets is an educated supposition, based on data, experience, research and a series of assumptions. Even if we predict the right direction of travel for global markets, it is practically impossible to predict by how much markets will rise, or fall, and how quickly. Now, think through the additional permutations available since we also hold a number of currency, fixed income, property and alternative investments.
As I told my friend, the question “is now the right time to invest?” should be answered with a set of questions, as the answer does not hinge on the stock exchange, but on you. Ask yourself why you want to invest, what are your goals and objectives, and what happens if you don’t achieve them. When do you need the money by? How much of your wealth are you investing? For whom are you investing – you or your children? How much risk do you estimate you need to take to meet your needs? How much risk can you afford to take?
Having acknowledged all of this, I of course obliged and answered the real question which was asked: what do you reckon stock markets are going to do and why? So while what follows is some of the analysis behind that response, I would ask the reader to bear in mind that the answer to the title question actually revolves around them.
The International Monetary Fund (IMF) anticipates that the global economy will shrink by 4.9% this year, in what will be the worst recession since the great depression. Advanced (or developed) economies will see the gravest numbers, according to the IMF. These forecasts are based on the economic conditions remaining broadly similar to the current situation i.e. without any more country-wide lockdowns being imposed.
This is despite these economies being buoyed up by huge levels of stimulus1. Global indebtedness is reaching levels, as a percentage of GDP, that is even surpassing the post-World War II peak. This is important as it means governments will need to control the costs of that debt, which has significant implications for investors. Some might even argue that we no longer have access to a ‘free market’.
Meanwhile, consumer and company spending has fallen through the floor, despite the support of governments, so corporate earnings have also been affected. Taking the S&P 500, as an example, the earnings reported so far are around 45% lower than 2019’s second quarter, marking the most significant drop since the 2008 global financial crisis2. This is despite 80% of the companies who have reported beating earnings estimates and 66% of the companies beating revenue estimates.
You would imagine that with this backdrop of gloom stock markets would be trading deeply in the red. But if 2020 wasn’t strange enough, it is even stranger if you take a cursory glance at stock markets – and particularly in the US. These paint a very different picture to that presented by the underlying data. In their support of the economy, central banks are seen by investors as being prepared to do “whatever it takes”.
On 27 July2, you would have needed to pay US$23.70 for US$1 of earnings from S&P 500 companies, the most in a decade. For the Nasdaq 100, you would have needed to pay US$33.50, given its technology bias. Equities dipped in the past two weeks, but they have picked up a little, as at the time of writing, and could start to plough higher still. This is despite the economy sitting at its weakest point at any time in the past 90 years and COVID-19 cases and deaths climbing. While rising markets are not our base case scenario, a correction might not happen for three reasons:
- The increases are not universal, with appetite unusually skewed to the biggest names. The five largest US stocks – Apple, Amazon, Alphabet, Facebook and Microsoft – now account for about a quarter of the S&P 500’s total value. Five years ago that level was around 12% of the index. It is no secret that value stocks (-9.81%) have significantly underperformed their growth peers (+16.28%) so far this year. We looked at these differences before, but it is noteworthy that the average stock is only around 75% of its value versus the August 2018 high.
- Not much of the current equity investment is being driven by fundamental expectations of excess returns. Rather, people are investing in equities because the return from bonds is close to zero or, in some instances, below.
If you look at an aggregate3 of valuations, investor leverage, cash sitting on the side-lines, investor sentiment and the supply of equities, all of which are indicators of the speculation present in markets, the sum is at one of its lowest levels since the 2011 selloff. There is a wall of cash out there and most of it is making its way into equity markets, at a time when equities are in limited supply. There are very few coming to the market and companies are actively buying back their own shares.
Given this limited degree of speculative excesses and the massive fiscal injections by governments, as well as the extraordinary actions by the central banks I mentioned earlier, it is entirely possible that even if there is an equity sell-off, it could be limited.
This is despite what’s happening in the real world. In ‘normal’ times, consumer confidence and the stock markets walk side-by-side. But recently, they have become disconnected and are now going in different directions: the stock market is going up and consumer confidence down. As such, there could be a trigger for a decline in share prices at any time.
We have never seen a recession due to a health scare. We have willingly stepped into economic difficulties in order to protect lives and healthcare systems. However, history shows us that the world usually responds positively to traumas. In speaking to many clients and business owners, I often hear “it has forced us to push through change”. And the speed of change is accelerating. The way we do business in order to protect the environment is changing far faster than Greta Thunberg ever thought possible.
As investors, this accelerated rate of change presents an opportunity (for enhanced returns and reduced costs), but also risk. The opportunity is to invest in companies that are able to adapt to the pandemic and get on with business as unusual. But as we have seen, these are very few and far between and are already very expensive. So, the risk is that you don’t carefully evaluate your portfolios and monitor what’s going on, and you end up buying companies that are unlikely to survive in the new environment.
And while there are many reasons why the stock market could go up or down, there are ways to mitigate these risks through diversification and the active approach to research and monitoring that a wealth manager such as Nedbank Private Wealth provides.
There is no single, universal answer to the question “is now the right time to invest?” and the answers will change often and quickly. But there are long-term, reliable answers to the questions we ask to help you establish an appropriate investment plan. In setting out why you invest, and what it will take to meet your short, medium and longer term goals, you may even realise that the stock market question is of secondary importance to you.
Clients of Nedbank Private Wealth can get in touch with their private bankers or relationship managers directly to understand how their portfolios are responding to market events or call +44 (0)1624 645000.
If you would like to find out more about how we can help you manage your investments, please contact us on the same number as above, or complete the contact us form below to understand how we might manage your money.