Until last week’s lockdown extension, South Africans would have been preparing to burst forth from their state of isolation tonight. It threatened to be an explosion of vuvuzelas, trumpetted while you cracked open the last bottle of whatever it was you’d been saving for the occasion. (Or the last bottle that you were confident enough to drink, in the expectation that, mercifully, your local bottle store would be open the day after.)
Instead, here we are, grimly getting on with the business of not doing very much at all.
The realisation that this could be a protracted imposition in our lives seems to have dealt the stock market a dose of glum reality, after a couple of weeks of euphoric gains.
Mohammed El Erian, the chief economic adviser to Allianz, reckons it’s far too soon to celebrate the mythical V-shaped recovery in markets which the more confident of commentators had predicted.
In the Financial Times, El Erian argues that sentiment is simply too bullish given the severity of the shutdown, the “inherently messy restart process, and consequent changes to the post-crisis landscape.”
But critically, El Erian has some great advice on what investors should do: move out of companies and sovereigns with weak balance sheets, sell exposure to companies that will find it hard to bounce back, and buy beneficiaries of an inevitable shift in behaviour over time.
So which companies are these exactly? Well, it’s clear that some punters are betting heavily that Amazon and Netflix, two pillars of the S&P 500’s FANGS establishment, will emerge from the pandemic in an unassailable position. Incredibly, amid a Covid-inspired market rout, Amazon shares hit an all-time high yesterday. Sure it’s reason for jubilation, but caution, too.
Here’s the thing: sentiment is so febrile and tenuous that any bit of news is likely to propel the market in one direction or another. We are in the skittish feline phase of market reaction and the only real game in town is volatility.
It does, however, seem that the gold bulls called it right — to the misery of almost all investment professionals who regard the metal as a barbarous relic. John Authers has written a smashing piece on the longevity of the yellow metal here. Gold’s rise has been lamented by SA market veteran David Shapiro, who, as an Arsenal supporter, has probably been subjected to more torment than any man should have to bear.
“My life is pure misery. Mercifully the crisis silenced those brash and bawling Liverpool supporters, but in their place we’re having to suffer those despairing and dolorous harbingers of doom and gloom, the gold bulls,” he said.
Of course, one reason why gold has climbed and stock markets are looking weaker again (and the JSE closed 3.1% weaker yesterday) is that nobody knows just what countries will look like when they finally emerge from this hell.
Witness what is happening to Italian debt, and this, despite a massive asset-purchase programme from the European Central Bank. The fractures between north and south Europe are deepening and Euroscepticism is intensifying. Read about that here.
The ECB’s intervention is just one of a rash of similar stimulus measures across the globe. SA’s Reserve Bank hasn’t been shy to step into the game either. But with each wave of stimulus, we’re intensifying the moral hazard inherent in our markets. Should we be keeping alive zombie companies which, in any normal market, would die? Would the knowledge that central banks are willing to provide an eternal lifeline, by way of the cash printing machines, not encourage bad corporate behaviour?
It’s an intriguing debate, and you can read one of the better articles on the subject, written by Jonathan Tepper, chief investment officer at Prevatt Capital, here.
*Talevi is FM Money & Investing editor
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