Page 44 - DIY Investor Magazine Issue 24

Exhibit 2: Global downgrades have eased after peaking mid- March
Source: Refinitiv, Edison calculations. Unweighted revision index shown.
However, it is the rate of change of consensus forecasts which gives more information for the short-term market direction.
The surge in cuts to analysts’ forecasts appears to have peaked around the 20th of March, at which point global forecasts were being cut by close to 5% per week.
Now, the rate of decline has moderated to 1% per week, albeit still a very large figure by normal standards. This has corresponded well to the timing of the rebound in financial markets over the same period.
We believe the first wave of the impact of COVID-19 has now passed through global markets and volatility in particular should start to diminish as the biggest uncertainties – such as whether or not countries would implement lockdowns – have been resolved.
While the timing of the release of lockdowns remains uncertain (and several weeks longer than we previously thought on 6th April), this risk is not of the same magnitude as the decision to shut the economy to implement a quarantine.
‘THE MARKET REBOUND SINCE THE LOWS OF MARCH HAS BEEN VERY SIGNIFICANT’
Nevertheless, if earnings forecasts are to stabilise close to current levels, investors and analysts will need to
see substantial progress towards a return to economic normality during Q2, or a second wave of downgrades will become increasingly likely.
In terms of our strategic views, we have progressively shifted from a cautious position on equity markets in January to neutral in the second half of March and then modestly overweight in early April.
The market rebound since the lows of March has been very significant however, with US markets rising by close to 30% since then – and by 10% since our overweight move only last week.
Investors are in many respects caught in a duel between fast-deteriorating fundamentals and an enormous monetary and fiscal stimulus to offset the impact of COVID-19.
With the peak in infection rates now visible in many nations, governments will have a difficult 3-way balance of tolerable levels of future infection against tolerable levels of economic harm to those not infected – and tolerable levels of damage to government balance sheets.
With global equity and credit markets now showing a substantial recovery from the lows we shift back to a neutral position on global markets.
Current valuation levels remain significantly lower than cycle averages but this is balanced by still-outstanding uncertainty in respect of the duration of lockdowns and the speed of recovery of private sector demand once lockdowns are eased.
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DIY Investor Magazine | Apr 2020 44