In late March – early April of 2020 no one could surely predict how the events would unfold. It seemed that the world was facing a new, insurmountable reality, and when the social and economic life of Europeans and Americans suddenly came to a halt, it was almost impossible to forecast how stock markets would react.
Some analysts spoke of the so-called U-shaped scenario, however most of them leaned towards the L-shaped one. So, what do we see today? The picture of the stock markets is actually V-shaped.
(While a V-shaped recovery indicates a quick rebound to pre-crisis levels, a U-shaped recovery implies that the damage lasts for a longer period before eventually recovering, but an L-shaped recovery signifies that growth never reaches pre-crisis levels for years, if at all.)
It is worth recalling that the dynamics of stock indices, as a rule, are a leading indicator, i.e. stock prices reflect investor expectations regarding the financial condition of corporations in 2 – 3 and sometimes even 6 months.
Unbelievably, the S&P500 index is over 3,100 points, which is less than 9 per cent lower than the historical maximums reached in February before the crisis, and the NASDAQ index is currently also updating his historical peaks.
So, what exactly is going on? It is worth recalling that the dynamics of stock indices, as a rule, are a leading indicator, i.e. stock prices reflect investor expectations regarding the financial condition of corporations in 2 – 3 and sometimes even 6 months.
Thus, the market really believes that the total amount of economic, fiscal and social measures taken by central banks and governments will indeed prove to be a powerful tool in combating an abrupt economic downturn around the world. Stock markets do not want to end the long-term uptrend (upward trend) which began more than 5 years ago.
The COVID-19 crisis is truly unique in its scale, and, hence, the measures taken by governments are also unprecedented. The US Congress has passed stimulus bills worth $2.3 trillion (Dh8.45 trillion). The programs deployed now have been far bigger than anything the central bank attempted during the financial crisis and were announced in much less time than the 2008 – 2009 efforts.
The stock markets are therefore driven more by the liquidity provided by central banks than by fundamental economic data.
On one hand, the current situation suggests a new consolidation, on the other hand there is also a chance that the path to new highs will be open when institutional investors will make new investments in order to jump on the bandwagon.
With liquidity inflows and possibly rising inflation, one thing is certain: commodities will be the winners.
In such a difficult-to-predict situation, assets need to be widely diversified. Investors with disposable liquidity should therefore also include gold and silver, as well as mining stocks in their portfolio.
The Canadian silver mines ‘Pan American Silver’ and ‘First Majestic Silver’ have had a particularly interesting development lately and should continue to have significant potential as the price of silver increases.
In addition to precious metals and countercyclical stocks, it is also worth taking a look at other commodity stocks, such as the Russian gas giant ‘GAZPROM’. In addition to the attractive dividends, this group also benefits from rising commodity prices. With liquidity inflows and possibly rising inflation, one thing is certain: commodities will be the winners.
In such a difficult-to-predict situation, assets need to be widely diversified. Investors with disposable liquidity should therefore also include gold and silver, as well as mining stocks in their portfolio.
In conclusion, the use of these completely new monetary policy instruments can have effects that are not easily predictable, i.e. in inflation and oversaturation of the market.
In the end, I want to recall the age-old truth of the stock markets – trees don’t grow to the sky. Even though the markets can be leading to new highs, investments should be done with caution.
- Count Oliver of Wurmbrand-Stuppach is the founder of GWS Group, which is an international tax advisory, corporate service provider and leading trust company with offices in the UAE & Europe.
