Bank's head of portfolio management says rally is narrow but avalanche of government support means equities can surge higher
How the virus develops from here remains the great unknown. Does it re-accelerate into a second wave? Will we get a vaccine? Take this uncertainty out of the equation, however, and there is seemingly nothing holding back equity markets.
Derek Massey, head of portfolio management at HSBC Global Asset Management Canada, told WP the stimulus is only just beginning and that with the weight of monetary and fiscal support unleashed by governments, markets can go higher.
He believes that, from a valuation standpoint, there are areas of the market still reasonably priced but warned there should be concern at how concentrated the bounce back has been. Rather than a broad-based rally, it’s been dominated by technology stocks.
“They have hit the mother lode of everything going right despite this horrible health crisis,” Massey said. “A lot of those companies are the epitome of a social distance type of business.”
Previously traded in huge multiples because of their innovation, these firms are now leading the way because of lockdown and remote-working conditions. Massey said they are priced for perfection and the broad market hasn't followed suit to the same extent, although this imbalance is buffered dramatically by governments’ willingness to spend more and more.
Massey said: “What we're going to next is big rounds of fiscal spending and if we look particularly at the U.S., with an election coming up, both parties are incumbent to give or to promise as much as possible for their constituents to get into power.”
While there is a case of TINA (There Is No Alternative) with regards to equities because bonds are priced so high, investors can take comfort from the fact the stimulus is only just starting.
“The first round of stimulus was just survival stimulus,” Massey said. “When the economy goes into a sudden stop, people don't get paid anymore but they still need to put food on the table and we needed that stimulus globally to ensure people were able to survive.
“The next round of stimulus is going to be more supportive of economic growth, as opposed to a survival mechanism, as long as the pandemic doesn't re-accelerate again – and that's the big question no one knows anything about.”
With the forward-looking market hitting highs and making positive noises, the portfolio manager cautioned against the false narrative that the economy has improved massively.
“We are not even getting back to where we were before,” he said. “The HSBC economic forecast is that it’ll be at least a year before we even get back to where we were before the pandemic broke, and that's with the eventuality of a vaccine coming within the next year. The market is forward looking, it's narrow in breadth but as long as there's lots of government support it can go higher.”
A second wave is not HSBC’s base case, with the bank forecasting a Nike-style swoosh recovery with fits and starts. The global asset management team is constantly rebalancing portfolios as we emerge from the shortest bear market in history and then the fastest recovery in history.
When the market dropped, it was selling bonds, buying equities and repositioning to ensure the long-term objectives of clients were being met. Now, mainly in the U.S., investors somewhat come full circle, and Massey is in some cases slightly reducing equities because the bounce back has been strong and there remains uncertainty over COVID-19.
He said: “If we get a re-acceleration of infections, and we have to scale back again, then that's obviously going to affect companies and earnings. We want to make sure that we're not taking too big of a bet.”