We are not talking about black swans about the future of the Stock Exchanges. At the moment there are no surprises like the one used by the economist Nassin Nicholas Taleb to develop this theory when it was discovered in the seventeenth century that black swans existed in Australia. The financial world faces a very specific calendar of uncertainties: the evolution of Covid-19, Brexit or the US elections in November. These certainties are mixed with the evolution of oil in the coming months, the march of inflation, the valuation of the markets and how far the growth of the public debt goes to face the ravages of the pandemic. And the money in the Stock Market has begun to get nervous before this panorama until the end of the year.
In this September there have been important falls dictated from the US Stock Exchanges and in recent days the sessions have been splicing down. The Nasdaq technology has a 9% drop in the month, while the Ibex 35 falls more than 5% and the EuroStoxx 50 loses 4.5%. What do the experts think about what can happen with these uncertainties that weigh on the market? How will they condition the future of the Stock Exchanges? The head of investment strategy of the manager Martin Currie (Franklin Templeton group), Kim Catechis, is clear in his answer: “The picture is ugly, very ugly”. And of course, Covid-19 leads the danger to the world of money.
The pandemic is out of control again
Catechis believes that investors have not realized that the pandemic is rampant in the world. Furthermore, she complains that unlike central banks that show enormous cooperation, governments are each on their own, with the exception of the Eurozone. This situation will bring strong volatility to the Stock Exchanges that will only disappear when an effective vaccine against the virus arrives. But it also qualifies optimism about the vaccine: “when it is discovered, it would take about 18 months for it to reach the entire population. Ideally, there should not be a single provider of the remedy but 4 or 5 available that shorten this period. Of course, as the Stock Market anticipates events, when an effective vaccine is presented the rally will be very pronounced, ”he explains.
This second wave of Covid-19 is for Félix López, the managing partner of Atl Capital, the greatest uncertainty for the Stock Exchanges, with an exponential growth in the contagion curves. “Confinement is the only effective solution until a vaccine appears. Now we know the consequences and monetary and fiscal policies have been put in place that will soften the impact that we saw in March ”, he indicates. And he explains that, when it comes to investing, the Stock Market is less expensive than, for example, fixed income.
The second wave of Covid-19 is less harsh than in March but the contagion skyrockets
Patrik Lang, director of global equity strategy at Julius Baer dares to quantify the punishment that Covid-19 can represent on the S&P 500 (it has fallen 7% in September): “we don’t see much more than 10% to the It is down from current levels in the S&P 500 and we do not expect a sustained decline below 3,100 points. The market should bottom out in October. ” And this vision is based on the measures (tests, tracing, closing of premises, masks) that are more efficient, that fatal cases have not increased significantly in Europe and that new infections are mainly due to more social activities. than economic, which questions the need for business closures ”, he concludes.
Towards a hard and no-deal Brexit
The UK’s FTSE 100 index is down over 20%, while the Euro Stoxx 600 index is down just over 11% so far this year in sterling and euros respectively. If we compare the two in euros, the UK fares even worse due to the weakness of the pound relative to the euro, while the December 31, 2020 deadline to agree on the terms of their future relationship is fast approaching.
Mobeen Tahir, Associate Director of Wisdom Tree, explains that although the pandemic is causing more economic damage to the UK than to Europe, the Brexit factor cannot be ignored. The European Union (EU) accounts for 43% of all UK exports and 51% of all UK imports. The UK’s share of EU trade is not negligible as the UK accounts for 14.9% of all EU exports and 10% of all EU imports. The breakup without a conducive trade deal will put the UK’s exports at a competitive disadvantage and affect it far more than the EU.
The US presidential elections will be, together with the virus, a great source of uncertainty
“Risky politics and deception have been typical features of every stage of Brexit negotiations and a last-minute deal is still quite possible. Any deal that is struck at the last minute is likely to be fairly narrow in scope, focusing primarily on avoiding tariffs and quotas in manufacturing. That would amount to a pretty tough Brexit, ”explains Paul O’Connor, multi-asset manager at Janus Henderson, who sees the decline in sterling as just a beginning.
Another Trump victory, better for stocks?
The analysts consulted agree that a victory for Donald Trump in the presidential elections of the United States on November 3 would favor the Stock Exchanges due to their pro-business policies, which are reflected in less taxes. Even so, they also consider that Joe Biden will be the winner of these elections. They also point to these elections as the factor of most volatility for the Stock Exchanges after the Covid-19 march. Kim Catechis disagrees with this general view, as polls say Republican voters will go to the polls en masse, while Democrats will opt more for the mail-in vote. “This will cause a shadow of doubts about these elections with its reflection in the markets since the total count could end in mid-December”, adds the head of investment strategy of the manager Martin Currie (Franklin Templeton group).
The team of the manager Natixis IM Iberia bets in a majority way for a victory of the democratic candidate Joe Biden that, although it may be favorable for the economy and world trade, it will not be so so for the Stock Exchanges, contrary to what would happen with a eventual reelection of Trump, given the pro-business and tax-cutting nature that characterizes the Republican Administration.
Didier Saint-Georges, member of the strategic investment committee of the manager Carmignac, points out that the biggest problem could be the uncertainty surrounding the electoral process, with a very tense internal climate in the debates, and a possibly even result that opens the doors to fierce challenges. “Projected tax increases could moderate and, conversely, spending on infrastructure would be a typical Keynesian measure. Biden’s commitment to renewable energy worries the traditional energy sector, while the population support approach would favor the consumer sectors ”. And he adds: “The position vis-à-vis China would certainly remain very firm, albeit more peaceful, but the most notable shift could occur vis-à-vis Europe, towards a less threatening and more cooperative relationship,” says Saint-Georges.
Finally, Mona Mahajan, US investment strategist at Allianz Global Investors explains that “President Trump and former Vice President Biden have markedly different views on corporate tax, energy and trade between the United States and China, which they can have a substantial impact on markets and on investors’ portfolios ”. And she adds: “emerging technology (including 5G, artificial intelligence and cybersecurity), infrastructure and clean energy can have strong prospects after the elections.”
Nasdaq’s beacon, tech bubble?
In the medium term, other unknowns remain, especially the one related to how the high public deficits will be financed that will be inherited from the huge debt issuance with which the response to the pandemic is taking place. But on the near horizon there is concern about the valuation of Stock Exchanges with very different evolution, in which the technological indices rise with little pause and where the polarization between the winning and losing sectors of the crisis is increasing: disruptive companies linked to health versus the old economy.
Patrik Lang of the Julius Baer bank rules out that the rally in tech stocks will lead to a tech bubble. “In Europe and the US, the sector trades at a 30% premium compared to the market in general. This is in line with the average of the last 20 years and is due to the strong growth of the earnings of the sector, of around 20%. ” In addition, “the decisive factor today is whether companies will be able to maintain their strong earnings growth and we assume that this will be the case in the coming years and that, therefore, valuations will be sustainable,” he concludes.