Weekly Update - Dislocation Between Strong Equity Markets and Weak Economic Data

Weekly Update - Dislocation Between Strong Equity Markets and Weak Economic Data


The global COVID-19 pandemic has caused a sudden economic shock, abruptly reversing the positive economic outlook and leading to a rapid decline in global equity markets. However, since mid-March, global equities have rebounded by 24% and are now just 15% below their 1 January level.


First, it is important to remember that the financial markets are forward-looking and will try to discount the medium-term economic path. Remember that in the week commencing 9 March, when global equity markets fell 12%, economic data remained robust with new weekly US jobless claims below 300,000 – perfectly sanguine compared to the 20 million that would be recorded in the subsequent four weeks of April. Back in March, as equity markets tumbled, they were predicting the dire economic data that we are now currently experiencing. Rallying equity markets point to a future improvement in economic data as we move from “despair” to “repair”. Second, the loss of one year’s earnings is not financially material for a business that is structurally intact, as most of the value of a company is retained over the long term.

 width=343 height=335 /><br/><br/> <br/><br/>Consequently, as financial markets look forward to what we hope is a future economic recovery, even the current dire economic conditions – if short-lived – should only have a limited impact on the price of risk assets. This partially explains the apparent dislocation between strong equity markets and the economic data. The Discounted Cash Flow is also sensitive to the discount rate. In periods of high interest rates, the value of receiving cash flows in the future diminishes and the opposite occurs in periods of low interest rates.<br/><br/> <br/><h5>STAYING INVESTED</h5><br/>All major crises appear to be buying opportunities for long-term investors when looked at with the benefit of hindsight. We think that COVID-19 should be an acute, rather than structural, episode. Once COVID-19 is contained, and ultimately medically managed, the economy is likely to return to a favourable economic trajectory and shift from its current “despair” to a “repair” phase. We believe in the value of remaining invested in financial markets, especially in periods of elevated risk premiums, and within our equity selection we seek what we believe to be structural winners that may benefit from strong secular trends that are likely to be rewarded over the longer term.<br/><br/> <br/><h5>COVID-19 WATCH</h5><br/>Globally confirmed cases of COVID-19 exceeded 4.7 million, up from approximately 4 million seven days previously. Last week, China – the virus’ believed country of origin – confirmed fewer than 100 new COVID-19 cases, and consequently dropped out of the top 10 countries for confirmed cases.<br/><br/><img class=alignnone wp-image-6224 size-full  data-cke-saved-src=https://brownshipley.com/wp-content/uploads/2020/05/Image-2-1.png src=https://brownshipley.com/wp-content/uploads/2020/05/Image-2-1.png alt=


Of the US’s approximately 1.5 million confirmed cases, the state of New York has the largest number, with approximately 350,000 confirmed cases. Removing New York from the US data reveals that while the New York pandemic has been brought under control, daily cases remain elevated elsewhere in the US. This highlights the risk of a “second wave” in the US as social distancing measures are relaxed.

We assess the risk of a second wave by using high frequency data to assess the impact of state reopening. Mobility data provided by Google gives an evidence-based view on economic activity and citizens’ movements. Using this data we can compare New York to the rest of the United States. We observe, in keeping with the severity of the New York pandemic, that, in New York, retail and recreation activity declined to a greater extent than elsewhere in the US, with footfall in mid-April declining 75% compared to the baseline.

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Bill Street
Group Chief Investment Officer

Amrendra Singh
James Purcell

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