Once deemed to be some of the riskiest assets (albeit with higher reward potential), equities are effectively now safe-haven assets. This year’s coronavirus pandemic saw a steep sell off in equities, followed by a historically quick recovery, which came as a result of the vast amount of stimulus being injected into the economy.
How Did We Get Here?
During the global financial crisis of 2008, central banks around the world were forced into lowering rates and in the years that followed, we saw several banks adding further support through the unconventional monetary policy tools of quantitative easing and negative rates.
However, the combination of QE and ultra-low rates meant that yields also fell. Since then, the return on investment-grade fixed income assets has been low and nowhere near attractive enough for investors to allocate a substantial amount of their portfolio into. As a result, most money has been continuously flowing into equities over the past decade, with the trend likely to continue. We have also seen more retail traders getting involved in the markets due to increased promotion and easier access to leverage. The result of this has been an extended rally in equities and arguably, significant overvaluation.
What Happened During the Coronavirus Pandemic?
When the coronavirus first emerged in China around late 2019, the markets took little notice. However, as China were forced into a lockdown and cases then began emerging in other countries, the markets woke up to the possibility of multiple national lockdowns, which resulted in one of the steepest sell-offs in the equities complex.
As more countries effectively shut down their economies, central banks and governments around the world pulled out an unprecedented set of stimulus measures to support their economies, whilst some government even banned short-selling on equities.
Although these measures were introduced to support the economy and prevent permanent damage, make no mistake that these authorities were also trying to support the stock markets. The significant overvaluation in stocks meant that if stocks had corrected to ‘fair value’, it would have almost certainly led to a financial crisis. We can argue that central banks now have an unofficial mandate to support equities. A few years ago, central banks purchasing equities would have been unthinkable, but the latest response from central banks tells us we shouldn’t rule this out.
What’s Next For Equities?
Since the injection of an unprecedented amount of monetary and fiscal stimulus, equities have recovered almost as quickly as they fell, with some printing fresh all time highs, and it is only a matter of time before other equities follow.
As the global economy recovers from this recession, equities are expected to continue pushing higher, despite several downside risks and global headwinds. Buying the dips on equities and scaling into a broad recovery portfolio over the coming months remains our core strategy.