Markets have continued to extend their rally, alongside improving sentiment across most asset classes including stocks, property and secured loans. This improved sentiment has been met with surprise by many.
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What are the stockmarkets telling us?
Since bottoming on March 23rd the FTSE100 has risen 26%, the S&P500 by 38% and the tech-heavy Nasdaq by 40%. The FTSE is now 17% below its pre-Covid peak, the S&P is 8% under and the Nasdaq has almost fully recovered – now only 1% below.
We know economic data will look bad: UK GDP in Q2 may see a 25% contraction (to be announced in July) and the full-year number around -10%. Unemployment will also rise once furlough is over.
But as mentioned here previously, markets price the future and not today’s dramatic headlines. As lockdowns ease around the world, analysts expect a resumption in economic activity. In the absence of a second wave and further lockdowns, a GDP rebound of 5-10% is expected in 2021 and we can expect a full recovery of this year’s lost GDP by 2022. Not quite a sharp V-shaped recovery but still reasonable. At the same time, global liquidity remains supportive to asset prices and interest rates will stay low for longer..
So the market rally tells us of a recovery in corporate earnings and GDP over the next 24 months. It also tells us the “pain trade” is further gains. Why? Given the general disbelief that markets have rallied in the middle of a deep recession, it implies that many individuals, pension funds and institutions are “underweight” equities. This is supported by published asset allocation surveys – the chart below is from JPMorgan showing equity weightings vs history.
If the rally continues these investors may be forced to buy equities.
The big risk is a second wave. But as time passes without this materialising, the justification for the rally will continue.
Transactions clearly collapsed due to the lockdown. On prices, the latest Nationwide study suggests prices fell 1.7% in May (vs April) but rose 1.8% on an annual basis. Given the low level of transactions the quality of this price data is questionable but we can see sentiment has improved since March and April. Visits to online portals such as Rightmove and Zoopla have grown significantly as have buyer enquiries to estate agents.
The availability of credit is a critical driver of the housing market. In contrast to the financial crisis of 2008-09 lenders are in much better health, they’re not fighting for their lives, and have better capacity to lend. Recently, many lenders have reverted maximum LTVs to pre-Covid levels. As long as the housing market stays stable, lenders will keep extending finance – at volume and at attractive interest rates. So the overall picture for the housing market appears healthy and my early expectations (from March) of a 10-20% decline might be on the pessimistic side.
Secured Property Loans
Given the brighter sentiment in the housing market, the outlook for secured property loans remains attractive. Actual defaults have stayed very low and lenders have been flexible to extend loans to projects delayed by Covid. I have seen many RICS surveyors, when refreshing their pre-Covid valuations and GDVs, coming back with unchanged current valuations. This adds further support to an asset class which offers attractive returns with low volatility.
Opportunities are opening up and i am seeing better quality dealflow coming through. One is very close to being signed off and my DD risk report will be available soon to those who have completed a risk disclosure. If you have not, please access the form at the bottom of this email.
As investors we must always be mindful of the risks. In my view there are three major known risks to watch (in brackets, the leading indicators to follow):
1) A major second wave in the virus, leading to new lockdowns (keep an eye on infection rates in countries that eased lockdowns before the UK – eg Singapore, South Korea, Japan, Germany, Italy, Spain)
2) A failure of the expected economic rebound over the next 1-2 years (keep an eye on advanced indicators such as PMI data)
3) Ramping up of global tensions vs China
Presentation and Podcasts
I recently covered this stuff in more detail in the following video and podcast:
YouTube Presentation with charts on the markets and comparisons vs 2008
Podcast on Wealthtalk discussing the outlook for markets (also available on Spotify – search “WealthTalk”)
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