Note Précis May 29,2020- Not Becalmed But Evolving: Contrary to the sharp equity index and valuation upswings globally from March 2020 lows, we see pandemic health, economic and political issues as not becalmed but instead evolving. Human traumas do elicit initial ranged responses, including saying all is well. Full responses evolve over fullness of time. The long term ability to manage and solvency are yet to be assayed. Large equity index upward momentum and rapid equity sector rotation contrast with high CCC corporate bond yields and collectively the much larger fixed income, commodities and currency (FICCs) markets. In basically liquidity operations, trillions of dollars in stimulus have been assumed by governments and central banks. As in Japan post 1990 and globally post the 2008 credit debacle, issues now remain about the efficacy of zombie companies, solvency and longer term efficiency.
Valuation is not only a function of interest rates but also of growth prospects. Global and individual country economic contraction emerge. The impact of Covid-19 shutdowns only partially hit in late Q1/2020. Fuller impact is emerging in Q2/2020. The amplitude of recovery beyond is yet to be assessed. Compared to unfettered stimulus, a clear real time alternative was in southeast Asia, post the emerging countries crisis of the late 1990s. There, flexibility and robust restructuring made for renewal and more opportunity than alternate modalities elsewhere at the time.
Increased nationalism appears in the political response to the Covid-19 crisis and not just over personal protective equipment. Currently there exists increased domestic political fissure in many countries. Further of global impact, tensions between the U.S. and China appear now hardening even amid pandemic or perhaps because of it, as is classic between superpowers. Logistics patterns that developed over years have been tested and seem likely to change, perhaps with more government intervention.
Much as evolved about and between strategically important financial institutions after the 2008 credit induced crisis, increased differentiation in strategically crucial enterprises could now flow from this pandemic induced crisis. Across capital market investments as compared to the momentum/fiscal/monetary largesse post the 2008 credit crisis and again now in reaction to pandemic, a quality of delivery slant is yet to fully evolve. Meantime amid extended valuation, volatility flareups remain likely. Portfolio diversification remains required. StrategeInvest’s independent consultancy operates as Subodh Kumar & Associates. The views represented are those of the analyst at the date noted. They do not represent investment advice for which the reader should consult their investment and/or tax advisers. Any hyperlinks are for information only and not represented as accurate. E.o.e.