Despite the profound health crisis caused by the coronavirus, and its enormous impact on the financial markets and the economy, some experts are advising people to remain calm and persevere in equity investments. This is the case of Banco Mediolanum, which has published a video prepared by its specialists, in which they demonstrate with arguments the thesis of "not getting carried away by emotions. Because you have to be afraid of the virus, not the market".
The video is entitled "This time it's no different", and begins with some positive data on this crisis, which is neither perceived nor appreciated for what it is worth. Thus, 76% of those infected in China have already been cured, and as a result, countries such as China itself or Korea are beating the pandemic. Because the spread of the coronavirus and its impact on people's health have proved easier to control than in the case of other pandemics such as AIDS, for example. Or that there has been the biggest rise in the Dow Jones since 1933.
Post-coronavirus market scenario
Banco Mediolanum experts review the effects that the coronavirus is having on the markets and the economy. They are as follows:
- Market volatility is very high, both in equities and fixed income, reaching levels not seen in previous crises.
- Peripheral government bond spreads in Europe soar. Government bond yields in Spain, Italy, Greece and Portugal are rising sharply and the price is falling, reducing the valuation of this asset.
- Equity markets have suffered, but in some such as Japan the fall is not as pronounced (20%). In Spain and Italy, they are down 30%. The MSWI, a diversified global stock index, is holding up.
- PMI indices - business confidence levels - have fallen below 50, which is the level at which economic growth normalises.
- The fall of the US stock market has been much faster and deeper than other crises, with the exception of the 29th crisis, although this one lasted longer.
GLOBAL EQUITY INDICES EVOLUTION IN 2020 (25 March)
COMPARISON OF THE EVOLUTION OF THE US STOCK MARKET DURING PREVIOUS CRISES WITH THE CURRENT ONE
Against this backdrop, the experts at Banco Mediolanum estimate a "U-shaped" rather than a "V-shaped" recovery, i.e. one that is more gradual over time than abrupt. Because the coronavirus is generating a progressive slowdown in trade and distribution at a global level, and the countries that are emerging from the health crisis, such as China, are doing so gradually, while the US is also entering the most intense phase of the crisis progressively.
The "antibodies" of the market".
Banco Mediolanum's optimism about the evolution of the crisis is based on a series of factors that they call "antibodies", on which the recovery of the economy will be based.
- Central banks will continue to keep interest rates very low, so that business financing will be very cheap when the crisis is over.
- Countries and institutions have adopted numerous aid measures. In Europe and the US, they have decided that such aid should be unlimited.
- Commodity prices have fallen, which will allow companies to maintain profit margins as they emerge from the crisis.
- China's production capacity has already reached 80% of the total.
INTEREST RATE COMPARISON OF EUROPEAN COUNTRIES (25 March)
RAW MATERIAL PRICE EVOLUTION 2016-2020 (25 March)
Historical developments
Finally, the stock market's performance in previous crises reaffirms the wisdom of persevering with stock market investments without panicking. This is demonstrated by a series of historical data
- From 2010 until today, equity markets continue to maintain returns above 100%, despite occasional turbulence.
- From 1993 to 2019, the S&P 500 index, the most representative index of the US stock market, has risen by 1.170%. If an investor had not participated in the 5 best sessions of this period, his profit would have been 742%. If he had not participated in the top 30 sessions, he would still have made a profit of 159%.
- The recovery rate of the stock markets is much higher than the depth of the crises in the entire history of the stock market. Because the maximum duration of stock market crises has been 36 months, while the last expansion has been as long as 131 months.
In conclusion, and taking into account the historical evolution and performance of the stock market in the face of the various crises that have affected the economy and the markets, the experts at Banco Mediolanum recommend equities as the most suitable asset class for investors who have a long-term vision in terms of their exposure to the markets.
COMPARISON OF DURATION IN MONTHS OF EXPANSION OF THE US STOCK MARKET WITH DURATION OF FALLS
Javier Ferrer
Head of the Financial Communication Department of Proa Comunicación