Coronavirus infection numbers take a back seat as optimism drives markets
- Covid-19’s fallout is still causing anxiety, but investors take comfort from central banks’ massive liquidity injections and signs of US economic recovery
- However, the resurgence of the virus in some parts of the US should not be ignored
In Europe, by contrast, where strict lockdowns were imposed and countries only began to lift restrictions once their infection curves had flattened out, the daily number of new cases has fallen dramatically since early April.
Europe’s success is accentuated by the recent surge in infections in parts of America. A growing list of states across the south and west of the country (including California, Texas and Florida which, together, account for nearly 30 per cent of America’s gross domestic product) have seen their daily case rates more than double over the past month, forcing them to halt or reverse their reopenings.
Financial markets, which have hitherto proved insensitive to differences in countries’ handling of the pandemic, appear to be taking note. Since May 14, the Euro Stoxx 50 index, the main gauge of euro zone shares, has risen 17 per cent, compared with an increase of just 9 per cent for the benchmark S&P 500 index.
Even the equity market of Italy – one of the countries hardest hit by Covid-19 – has outperformed the technology-heavy Nasdaq Composite index, which hit an all-time high on June 23.
Some fund managers are becoming more bullish on European stocks. Blackrock, a large asset manager, has just upgraded the region’s equities to “overweight”, partly “due to its public health measures”.
Other investors are more sanguine about the prospects for Asia, the region that has had the most success in containing the virus. According to Bloomberg, several large fund managers are betting that Asian equity funds will benefit from more inflows.
Yet, one need only look at the recent performance of Brazil’s stock market to see that Covid-19 is not a crucial determinant of sentiment. Since Brazil’s case count and death toll began to surge in mid-May, the Ibovespa, the country’s main stock index, has soared more than 22 per cent.
More tellingly, the results of an investor survey conducted by DataTrek Research, a US firm, last week showed that only 4 per cent of respondents believed that non-US developed market stocks – which include those in Europe – would be the best-performing asset class over the rest of 2020. On the other hand, nearly 40 per cent predicted the S&P 500 would fare the best.
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The fact is that while the fallout from Covid-19 is a major source of anxiety for investors, the combination of uncertainty over the path of the virus and more influential factors shaping sentiment – massive injections of liquidity by central banks, sharp differences in stock market valuations, and a stronger-than-expected recovery, notably in America – has diminished its importance as a driver of markets.
In Europe, the sharp rally in stocks is mostly attributable to attractive valuations. Data from Bloomberg shows that the Stoxx Europe 600 Index, the main gauge of European shares, is trading at a near-record discount to the S&P 500 based on a forward price-to-book ratio, a popular valuation tool.
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In the US, investors are taking comfort in the fact that the renewed lockdowns are localised. They are also reassured by the pickup in economic activity, with private-sector employment growing by more than 2 million last month and a gauge of manufacturing output returning to expansion territory.
Moreover, part of the reason there has been a surge in Covid-19 cases in southern and western states is because of increased testing. The death rates in these states are also much lower than those seen in northeastern states in March and April, when the virus began spreading across America.
Sentiment is even less likely to be determined by differences in countries’ handling of the pandemic, given the unprecedented amount of monetary stimulus across the globe, which is indiscriminately supporting all asset classes.
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Global equity markets are also benefiting from frequent bouts of optimism surrounding a potential vaccine. On Wednesday, news that an early trial of an experimental drug from Germany’s BioNTech and US pharmaceutical giant Pfizer yielded positive results overshadowed reports of record numbers of new cases in California, Texas and Arizona.
For the time being, investors feel they can afford to ignore the resurgence of the pandemic in the US. Yet, the sharper the increase in new cases, the bigger the threat to the fledgling recovery. Markets would do well to pay more attention to America’s rapidly steepening infection curve.
Nicholas Spiro is a partner at Lauressa Advisory