April 30, 2020

WHY ARE US EQUITY MARKETS SO WELL SUPPORTED AND WHAT IMPLICATIONS DOES IT HAVE FOR US ?

As US Equity markets greatly influence ours, and everyone is completely baffled by the gap between soaring US stocks in a monster depression, this note takes a look at what could be driving this euphoria.

Despite, once in a century PANDEMIC, with almost everyone hiding in their homes, it’s baffling that US markets are trading just 12% below their all-time highs and that too after 11 year of a one way bull run.

Since, we do strongly believe in the collective wisdom of market (at least most of the times), it has got us thinking into what could be the possible reasons?

Firstly, the markets are buoyed by the possibilities of an early medical solution, for instance Gilead’s Remdesivir as well as possibilities of many other solutions, that different companies are working upon.

It is not only above, but markets are also possibly drawing positive cues from the recent sample studies (based on antibody test) that have been undertaken at various locations in USA including New York State. These studies indicate a much lower mortality rate in the region of 0.7% for COVID 19 as compared to the earlier estimates. This could definitely be a game changer as the devastation from COVID 19 will be far more limited in such an instance.

People are anticipating that the above factors would encourage Govts all over the globe, not only to opt for early opening of the economies but also restoring greater degree of normalcy.

In this climate of doom and gloom, this is a big silver lining. Market participants are betting that such action will prevent the economy from the ravages of deep structural damage.

The current price action suggests that market is expecting the economies to snap back and are betting for a V shaped recovery.

What is WealthSpring’s take ?

In our opinion, US markets are not adequately pricing various risks that exists.

While, in all likelihood earlier lows may not be retested, the upside from here on looks very doubtful.

What are the various risks at this stage ?

Firstly, accuracy of various anti body testing methodologies is still a matter of concern. Though efforts continue on several platforms. Hence lower mortality rate has yet to be established.

Secondly, medical solution based on anti-viral cure may not be the ideal solution, particularly if one can get infected again. In such an instance, the economies will continue to suffer till a vaccine is found.

At the same time, in our opinion, markets are over estimating the impact of monetary and fiscal stimulus to kick start the economy, despite people hiding in their homes.

What is our take on the Indian Market ?

The Indian Markets have not bounced as much (still 22% lower than peak levels) as compared to 12% below peak levels for US markets.

While, we are somewhat more constructive about our markets, we are still cutting equity allocations to 55% levels, in view of the significant local risks that exists, including the risk of US markets coming down.