Equity and credit markets can retest recent lows, warns Chris Wood

Equity and credit can go back to their recent lows, and probably slip even further if the infections caused by the (Covid-19) pandemic do not peak out by April-end, wrote Christopher Wood, global head of equity strategy at Jefferies in GREED & fear, his weekly note to investors.

“In the unlikely case where infection rates do not peak out by the end of April, stock and credit will re-test recent lows and worse. At that point, there will be growing pressure for people to return to work because at a certain point the negative impact on the economy and people’s general livelihood becomes a bigger negative than the disease itself,” Wood said.

Over the past few weeks, Covid-19 hit, stimulus buoyed markets world over have risen close to a ‘bull phase’, typically defined as a rise of 20 per cent or more from the recent lows. The US, South Korea, Philippines and Indonesia have already entered technical bull markets, having risen over 20 per cent from their respective low levels. Indian benchmarks – the S&P BSE Sensex and the Nifty 50 – are also flirting with this territory now. READ ABOUT IT HERE

With most countries in a lockdown mode given how quickly Covid-19 has spread, Wood believes it will be tough to extend the lockdown phase beyond this quarter given the high debt levels. This, he says, is even more the case in the developing world than the developed since safety nets are not the same in the case of former to support the unemployed.

“It is hard to see the Western world locking itself down into another Great Depression. But that threat is real if the lockdowns are extended beyond this quarter because of the sheer level of outstanding debt. In this respect, it is hard to imagine that the three-week lockdown in activity ordered by Indian Prime Minister Narendra Modi on March 24 can be extended. That is assuming such a lockdown can even be implemented effectively in such a densely populated country,” Wood wrote.

Booster shot

On their part, the governments across the globe have been providing stimulus measures to help stem the likely rout caused by the lockdowns. In a recent move, US Federal Reserve (US Fed) announced a $2.3 trillion booster to help local governments and small and mid-sized businesses. The move comes after a series of similar measures over the past few weeks that brought key interest rates to near zero. READ ABOUT IT HERE

“It will take until Q4 before we can assess how much damage has been done to the US economy. At this point in time, we expect the economy to continue to struggle well after the lockdown has been lifted. Many businesses won’t survive or accumulate huge debt burdens and many households will face loss of income and employment. While the supply effects are prevailing at the moment, the demand effects may last for years,” cautions Philip Marey, senior US strategist at Rabobank International.

Oil market

Meanwhile, a deal between Russia and Saudi Arabia on production cut and the hope that the world economy would limp back to normalcy in the next quarter presents a good opportunity to buy oil-related stocks as the collapse in oil prices and a pick-up in economic activity can lead to a resurgence in demand, Wood says.

“As Wuhan was reopened after 11 weeks of lockdown, there was evidence of a pickup in demand for cars as people prefer not to take public transport. In this respect, China remains the key test case of trying to manage a return to normal which is why a second wave of infections there remains the biggest risk to world markets since it would set an ominous precedent for other countries,” Wood wrote.