Equities still risky despite optimistic signs

19 May 2020

Downward earnings revisions and bearish signals have led to concern the recent rally in riskier assets ignores potential headwinds in the US economy due to lower consumption, according to Janus Henderson.

Ashwin Alankar, Janus Henderson’s head of global asset allocation, said short-lived bounces in stock prices while markets established new lows were not unheard of.

“In late 2008, equities rallied in response to the Federal Reserve’s first round of quantitative easing and other programs aimed at supporting the economy,” Alankar said.

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“While investors welcomed these moves, it can be argued that some took their eye off the ball and didn’t fully grasp the harm being wrought on the real economy.”

However, other parts of the market had been reliable forward indicators, which included corporate earnings revisions and options prices.

Like in 2008, Alankar said earnings revisions and options markets were now indicating caution.

“Since the beginning of the year, full-year 2020 earnings have been revised downward at a pace faster than during the depths of 2008 as analysts take into account the near shuttering of the global economy,” Alankar said.

“It can be argued that the [COVID-19] pandemic is a one-off crisis – implying it’s isolated to this year – but following year earnings revisions for major indices have been just as torrid as what was registered in 2008.”

Higher unemployment, increased savings, lower consumption and altered consumer behaviour could also weigh on corporate prospects in the near-to-medium term.

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