Trump’s awakening to virus realities a huge step to calm markets
Never the term ‘relief rally’ was more appropriate than for Friday’s US stock market rebound as investors were heartened by Trump’s climb-down from his previous stance that the Covid-19 virus was not a serious matter. By declaring a national emergency, the US president announced a series of measures to enhance testing procedures to regain some control of the narrative in this crucial election year as many states and businesses had already beaten him to it and had called off conferences, public and sporting events, discouraging big gatherings and implementing stricter work-from-home regimes to try to contain the virus.
Encouraged by the stock market’s reaction, Trump went a step further later after market close by pledging his full support for the proposed House bill, Families First Coronavirus Response Act, introduced by Democrats. The bill pledges free testing for those in need, emergency unemployment insurance funds, requiring businesses to allow paid sick leave, loan payment relief for federally insured mortgages as well as emergency mortgage and rental assistance, grants for small businesses, funding for public transportation, increased food budgets for the poor and schools and emergency aid to colleges.
At the time of writing this publication, it was unclear how many of these proposals which were initially rejected by the Republican-dominated US Senate will eventually be passed into law. Nevertheless, we believe the bill once approved should go a long way in addressing the woefully inadequate US medical coverage for over 50mn uninsured and underinsured citizens. Come what may, this promises to be the biggest and most meaningful bipartisan law to be passed under the Trump administration.
Although by now the virus seems to have established a firm foothold in the US which we believe could become the biggest hot-spot in numbers of infected and could even overtake China in official cases, Trump Administration’s capitulation to the stark realities facing the nation should establish a more solid floor for global stock markets, at least in the shorter term. We also believe the latest US moves will also jolt other notably complacent governments in taking bolder actions including those in UK as well as in Japan which we have been highly critical of as PM Abe has also dithered for months to put proper containment measures in place for the sake of keeping Japan’s summer Olympics hopes alive.
Our strategy remains focused on buying secular growth names in tech
With key global central banks having also been supportive in their liquidity injections and by more accommodative monetary measures in pre-empting any financial system fall-out from recent market moves, and with a huge institutional investors’ cash pile sitting on the sidelines waiting to be deployed, we have been increasing our list of buy calls in the past week while suggesting covering short positions in names more related to the virus fallout which we had quickly identified since late January in providing some downside protection.
As always, we look to the US market for clues in how we position our calls in Japan’s stock market in the coming few weeks. We think we have passed the panic phase of forced deleveraging and liquidations that have led to most recent plunge in stock prices and have entered a more calmer phase of price discovery. We continue to suggest selectively buying secular growth names into their recent sharp share price corrections, namely those in the technology segment which we believe look to come out of this sharp economic downturn far more unscathed than many other industries.
Although we believe that the current demand shock will inevitably tip world’s biggest economies into a short-term recession, especially as the latest measures proposed to contain the virus will only hurt growth outlook even more, we think this year’s inevitable corporate earnings plunge have been generally factored in by now. With dubious v-shaped recovery scenarios having been largely abandoned by market strategists, we suspect investors will now be looking for indications of how quickly vaccines and other treatments will be made available to help normalise public behaviour which will prove crucial to next term’s recovery trajectory.
All eyes will now be on China which seems to have largely contained the spread of the virus for now with its draconian measures of city lockdowns and mandated quarantines. With its nation finally going back to work, it is only natural that we should see some spike in numbers of those infected. However, if this spike proves manageable which we suspect it will be as authorities are fully aware of the risks involved in cranking up the factories again, we think the markets will be reacting more positively to the containment program there as life goes back to some degree of normalcy.