Despite the deep health crisis caused by the coronavirus, and its enormous impact on financial markets and the economy, some experts advise to remain calm and persevere in investing in equities. This is the case of Banco Mediolanum, which has released a video produced by its specialists, in which they demonstrate with arguments the thesis of «not letting yourself be carried away by emotions. Because you have to be afraid of the virus, not the market».
The video is entitled «This time is no different», and begins with some positive data of this crisis, which are neither perceived nor valued in their right measure. Thus, 76% of those infected in China have already been cured, and therefore countries like China itself or Korea are beating the pandemic. Because the spread of the coronavirus and its impact on people’s health has been shown to be easier to control than in the case of other pandemics such as AIDS. Or that there has been the largest rise in the Dow Jones since 1933.
Scenario in the markets after the coronavirus
The experts at Banco Mediolanum review the effects that the coronavirus is having on the markets and the economy. They are as follows:
- Market volatility is very high in both equities and bonds, reaching levels not seen in previous crises.
- Spreads on peripheral government bonds in Europe are soaring. The return on public debt in Spain, Italy, Greece and Portugal rises sharply and the price falls, reducing the valuation of this asset.
- The equity markets have suffered, but in some, such as Japan, the fall is not as sharp (20%). In Spain and Italy, they are down 30%. The MSWI index, a diversified global stock market, is holding up.
- The PMI indexes – business confidence levels – have fallen below 50, which is the level from which economic growth is normalized.
- 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.
EVOLUTION OF WORLD INDICATIVE INCOME IN 2020 (25 March)
COMPARATIVE EVOLUTION OF THE STOCK EXCHANGE USED DURING PREVIOUS CRISES WITH THE CURRENT
In this scenario, the experts at Banco Mediolanum estimate a U-shaped recovery versus a V-shaped one, i.e. more progressive in time than abrupt. Because the coronavirus is generating a progressive slowdown in trade and distribution at a global level, and countries that are emerging from the health crisis, such as China, are doing so gradually, while the United States is also progressively entering the most intense phase of the crisis.
The «antibodies» of the market»
Banco Mediolanum’s optimism about the evolution of the crisis is based on a series of factors they call «antibodies», on which the recovery of the economy will be based.
- The central banks will continue to keep interest rates very low, so that financing for companies will be very cheap when the crisis is over.
- Countries and institutions have taken many measures to help. In Europe and the US they have decided that this aid will be unlimited.
- Raw material prices have fallen, which will allow companies to maintain profit margins when they come out of the crisis.
- China’s production capacity has now reached 80% of the total.
COMPARATIVE INTEREST RATES FOR PUBLIC DEBT EUROPEAN COUNTRIES (25 March)
PRICE EVOLUTION OF RAW MATERIALS 2016-2020 (25 March)
Historical evolution
Finally, the behavior of the stock market in other previous crises, reaffirms the wisdom of maintaining perseverance in investments in the stock market, without being carried away by panic. This is demonstrated by a series of historical data.
- From 2010 until today the equity markets continue to maintain returns above 100%, despite occasional turbulence.
- From 1993 to 2019, the S&P 500 index, the most representative 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 30 best sessions, he would still have made a profit of 159%.
- The percentage of stock market recovery 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 131 months.
In conclusion, and taking into account the historical evolution and the behaviour of the stock market in the face of occasional crises of all kinds that the economy and the markets have gone through, the experts at Banco Mediolanum recommend equity assets as the most suitable for those investors who have a long-term view of their exposure to the markets.
COMPARATIVE DURATION IN MONTHS OF EXPANSION USA STOCK MARKET WITH DURATION FALLS
Javier Ferrer
Head of Financial Communications at Proa Comunicación