Investors pricing in a perfect recovery from Covid-19 risk a rude awakening
- While market optimism is justified, as 2021 can hardly be worse, expectations of a speedy return to normality can still be shaken by any wrinkle in the vaccine roll-out. Investors are leaving themselves little margin of safety
It is safe to say that not a single investment strategist foresaw how 2020 would play out. It is also clear that even if analysts had known a year ago that the world was about to be hit by the most severe pandemic in a century, very few would have accurately predicted where markets have ended up this year.
The challenge facing prognosticators and commentators is not just to pinpoint key trends and events that will influence the direction of markets, but, more importantly, to predict how asset prices will react to these developments.
The Covid-19 crisis has sent markets on the wildest of roller-coaster rides. The fastest-ever bear market in global stocks – the MSCI All-Country World Index plunged more than 30 per cent between early February and mid-March – was followed by the quickest-ever recovery, with equities surpassing their pre-pandemic peak as early as mid-August.
That such an abrupt and dramatic shift in sentiment occurred against the backdrop of the worst recession since the Great Depression and a resurgence of the virus in the United States and Europe is all the more striking.
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Yet, despite the unprecedented shock, and the surge in volatility, 2020 is drawing to a close amid an outbreak of bullishness in markets. Bank of America’s latest fund manager survey, published on November 17, noted that expectations for global growth are at a 20-year high, while 84 per cent of respondents believe corporate profits will improve, an 18-year high. The burst of optimism is almost entirely attributable to one factor: the vaccine breakthrough.