Dislocation of asset prices leave our earlier scenario of stocks bottoming in doubt

Politicians failing to tackle the growing humanitarian crisis 
For the first time since this weekly publication began nearly two years ago, it’s been challenging to know where to really start. First and foremost, our last week’s assumption that stocks could find a solid floor in the short term led by the US markets as Trump’s government capitulates to realities facing the nation and in supporting the US House bill designed to help low income families, has proved wrong and hugely naive. 

Although the rate of share price declines have indeed eased in the past week as has volatility from peak levels seen in the previous week, there seems little natural support for stocks as we witness a disturbing dislocation that has led to all asset classes coming under selling pressure. Cash has reclaimed its thrown as hedged risks are failing to provide downside protection, leaving the smart money heading for the exit. In this market environment, it is difficult to see an imminent phase of price discovery which we had hoped would help support share prices. 

This multifaceted downturn has exposed fissures in the market and economic systems that will likely reverberate across the world for months to come. Although financial policy makers have been far more pro-active in throwing everything at it in the past week to provide much needed liquidity and help calm market anxieties, most country leaders and politicians have fallen woefully short of tackling this humanitarian crisis head on, more concerned about public perception than to save lives. 

We had hoped that WHO’s belated but ultimate declaration of a global pandemic would automatically trigger world-wide policy responses that would side-step the hard decisions need to be made by politicians in containing the contagion. However, nothing could have been further from that. Since then WHO’s chief, Dr Tedros has had to plead with country heads to take this call far more seriously and act quickly to put isolation measures in place to prevent the spread of the virus in taking more lives.  

The US political, economic and medical systems remain ill-prepared for the coming tremors 
In the US, Trump seems more pre-occupied with measure to stabilise the stock market by devising plans to help multinational corporations with promises of a big rescue package that ultimately looks to dwarf the size of the bailouts of the previous financial crisis. This has left industries scrambling to be prioritised in the pecking order for this coming tax-payers handout. The US government has gone as far as openly pondering taking equity stakes in publicly listed firms to help stem the tide. However, if Japan is any guide, public money purchases of equities will only hurt market liquidity and will lead to  market anomalies and distortions that will take years to undo.  

After years of being applauded for taking care of shareholders by raising corporate borrowings to buy back shares under the guise of efficient allocation of capital, the current demand shock has left most listed firms cash-strapped and their CEOs cap in hand in Washington for public money. Last year’s brief soul searching among corporate leaders to consider shifting away corporate governance from just prioritising shareholders return to emphasise more on all stakeholders has now become a distant memory as firms go into survival mode.  

In the meantime, US senators are fiercely debating the aid package bill passed by the House designed to provide low income households with financial assistance. As politicians bicker, the virus has spread quickly across all states with the official count of those infected surging to above 17,000 or the 5th highest country, coming from less than 100 only two weeks ago. With still inadequate testing capacities and reported shortages of medical supplies leaving the uninsured, underinsured, undocumented US residence and even the medical staffs in hospitals looking most vulnerable to the contagion, we suspect the worse is yet to come. 

Japan revs ups its market interventionist policies while Abe remains in a state of denial
In our own stock market in Japan, stock prices have also shown some signs of stability but not as we had hoped. BOJ’s decision to dramatically raise its stock ETF purchases has kept the stock market from falling further. However, its decision to heavily buy the ETFs of the broader Topix index rather than those of Nikkei 225 has wrecked further havoc in destroying alpha and dashing any hopes for the market to enter a price discovery phase. So not only the relative performance of active funds which had been invested in higher quality firms has blown up by foreign investors liquidating their holdings but BOJ’s latest intervention in buying stocks in the broader market has exasperated the situation. 

However, unlike the US and UK which are finally complying with suggestions of shutting down cities, what is even more alarming is that Japan’s government is actually looking to reverse its policy of school closures and to encourage people to go about their business. With lack of any comprehensive virus testing policy such as those seen in South Korea (where 20,000 are being tested daily), with less than 19,000 Japanese tested thus far and leading to a naturally low official tally of those infected which currently stands at just over 1000, prime minister Abe is reportedly keen in portraying an image that at least in Japan, the contagion is under control. Not unlike Trump’s obsession with the level of the stock market, Abe seems more fixated on controlling the narrative regarding Japan’s planned Olympics in July than anything else. We fear the coming policy of normalisation could lead to the virus raging through the nation.