Coronavirus recovery: hedging and market volatility show flaws in bullish narrative

While equity markets hail a rebound in economic activity and tech sector resilience, bond markets fear a severe Covid-19 shock driven by a spike in infections

If markets were really confident about the strength of the rise in economic activity, investors would not be hedging so aggressively against further turmoil

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Bronze sculptures of bulls, the symbol of the Hong Kong stock exchange, at Exchange Square in Central. Bullish news in equity markets and the tech sector is being tempered by sustained high volatility and aggressive hedging by investors. Photo: Warton Li

Published: 10:00pm, 16 Jul 2020Updated: 5:06am, 17 Jul 2020

The rally in global stock markets, which rebounded spectacularly following the dramatic pandemic-induced sell-off in March, is flagging. The MSCI All-Country World Index, a gauge of global equities, is up just 1 per cent since June 8. Even the CSI 300, which last week enjoyed its best run in five years, is losing momentum as foreign investors dump Chinese shares at a record pace, according to the Financial Times.

However, sentiment in equity markets remains upbeat. This is partly because of the unprecedented levels of monetary and fiscal stimulus to counter the economic fallout from Covid-19, but it is also because of optimism about the strength of the rise in economic activity as national lockdowns and social distancing measures are gradually phased out.

Bank of America’s latest fund manager survey, which was published on Tuesday, found that 72 per cent of respondents anticipated stronger global growth, the highest percentage since January 2014. Technology stocks were cited as the most popular trade-in markets by nearly 75 per cent of those surveyed, the highest share in the poll’s history.

Tech stocks have become a refuge for many investors as lockdowns and the persistent fear of the virus in the absence of a vaccine fuel demand for online shopping and streaming services. The New York Stock Exchange’s FANG+ Index, which includes some of the world’s biggest tech groups, has soared 50 per cent this year, compared with a 0.1 per cent fall for the benchmark S&P 500.

Yet, while investors pile into tech stocks, they are also parking their cash in traditionally safer parts of the market. Demand for government debt has surged since the pandemic erupted. The yield on the benchmark 10-year US Treasury bond has fallen 1.3 percentage points this year to 0.6 per cent, a whisker above its all-time low.