What exactly will happen when financial assistance finally subsides? :: Daily Business

The world‘s largest stock markets have once again managed to show rising prices after the fatigue brought in in September.

However, the number of pandemic patients in the world continues to grow, leading to the re-imposition of increasingly strict restrictions on assembly and movement in several places, which are stifling the economy. On the other hand, this situation leads to speculation about additional economic stimulus from the world‘s most influential governments and central banks, which may be able to keep financial market prices afloat in the short term.

“The sustained rise in stock markets finally subsided in September, and most global stock indices declined in the first month of autumn. The disproportionately sharp rise in some stocks in August was reminiscent of speculative mania. Therefore, the sudden fall of some shares, losing even 20-35% of their value in a few days, was not really a surprise. We have already said that such a sharp rise in the share prices of the largest and most respectable companies is illogical and in fact serves as a reminder that, despite the growth in recent months, the situation in the financial markets is still fragile, ”he said. Luminor Head of Investment Department Atis Krūmiņš.

Without the support of governments and central banks, many companies would face very serious financial difficulties and the risk of insolvency. However, even with such financial support, the financial results of companies have significantly deteriorated this year.

According to Refinitiv, in the second quarter of 2020, the profits and revenues of US companies included in the Standard & Poor’s 500 stock index fell by 31% and 9%, respectively, while the profits of European companies in the Stoxx 600 index fell by 51% and revenues fell by 20%. .

These indicators are expected to improve slightly by the end of the year, although the dynamics will remain negative. Most likely, only next year companies will be able to recover and demonstrate the growth of financial results, according to the expert. Nevertheless, there is a significant risk that such positive forecasts may not materialize if companies no longer receive state aid.

As long as governments continue to base …

“In previous historical cases, with the onset of an economic recession such as this year, the most indebted and under-competitive companies tend to go bankrupt and carry with them economic excesses. This time, however, such inefficient companies are still afloat thanks to cheap and widely available financing, which they obtain on the financial markets or directly from the government. As a result, the supply of goods and services has not yet shrunk significantly, as has often been the case during previous recessions. At the same time, demand usually declines during recessions, as rising unemployment and the economic situation have a negative impact on people’s incomes and purchasing power. Indeed, unemployment is currently extremely high worldwide, and in the United States, for example, the number of people who have lost their jobs completely continues to rise as fast as they did during the 2008 recession. Thanks to higher unemployment benefits and direct support provided by governments to the population, no significant decline in income and, consequently, demand has been observed yet, ”explains A. Krūmiņš and points out that this allows an interesting observation – while governments continue to support producers and consumers, demand and supply remains relatively high for the time being, giving the impression that the economy is returning to normal.

Namely, the improvement of macroeconomic indicators after the Covid-19 crisis greatly stimulates such a mood, therefore market participants are also generally optimistic about future economic growth. However, the key question remains unanswered: what exactly will happen when financial assistance finally subsides? In that case, consumption is likely to decline, leading to a fall in demand, followed by oversupply, declining corporate revenues and profits, and, if the financial markets react rationally, a fall in asset prices. The fall in the market in September partly confirms this logic, as new stimulus measures have not been announced in the United States due to disagreements between its two leading parties, where the funds already allocated have been almost used up. As a result, the engine, which is driving up macroeconomic indicators and asset prices, is starting to run out of fuel.

A. Krūmiņš says that, being aware of these threats, the US Democrats and Republicans have resumed negotiations on a bill that intends to create new incentives. The two parties cannot yet agree on the amount of funds to be allocated, but if the bill is passed, the total amount of incentives will almost certainly exceed one trillion US dollars. This is an enormous amount of money, and the adoption of such a bill is likely to have a positive effect on the market and the economy in the short term. Therefore, there is a possibility that the rise in risky asset prices will resume (at least for the next few months). The bill may also provide for the reissue of checks to US citizens worth $ 1,200, and if the same happens in the spring and some of this money is invested in trading in financial instruments, the recent speculative passion for some stocks, which has reached record highs, could also linger, judge Luminor expert.

Elections and pandemic

Of course, the situation with the spread of the coronavirus is once again in the spotlight. “The number of new cases is growing steadily across Europe, raising concerns about the reintroduction of large-scale movement restrictions similar to those that had to be complied with in the spring. Cities where the situation is particularly worrying, such as Madrid, have already reintroduced restrictions on movement, and other European regions with high morbidity rates may follow suit. In the United States, after a gradual decline in August, the number of new cases of Covid-19 began to grow gradually in mid-September, and at the beginning of October, the main news of the financial markets was related to US President Donald Trump’s coronavirus disease, ”says A. Krūmiņš.

It should be noted that less than a month remains until the US presidential election. Therefore, the news that the Trump Covid-19 test was positive further exacerbated the uncertainty about the market situation before and after the elections.

“Seasonally, the stock market is experiencing the biggest drop in the election year, just one month before the election of the new president, namely in October. This is quite logical, as investors do not want to risk their profits and lose them due to possible market fluctuations if their favorite is not elected. This time, it is really difficult to say which victory of the presidential candidate will be most in favor of financial assets and what the initial reaction of the market to the election of one or another candidate might be. Last time, many believed that the election of Donald Trump would seriously damage the stock market. However, the US stock price reached a new all-time high about a week after his election victory. This time, polls suggest that Joe Biden has a better chance of becoming president of the United States, and given his views on raising taxes for businesses and particularly wealthy people, the initial market reaction to his possible election may not be positive. However, no matter who wins the US presidential election, future market developments at least this year are likely to be determined by more important factors: the situation with Covid-19, macroeconomic trends, central bank behavior and the availability of new government incentives. Neither of the two candidates is likely to have the power and influence to control these factors, although the coming to power of Democrats in the White House and the U.S. Congressional Senate may lead to faster approval of incentives. As the market’s response to the many uncertainties – the adoption or rejection of the fiscal stimulus bill in the US, the spread of the coronavirus, election results and investor attitudes – cannot be expected, we should not rush to significantly increase the share of risky assets in portfolios, ”Krumins said.

However, he also reveals that there is a low level of readiness to make certain deals, which would allow to take advantage of the situation when governments and central banks continue to protect the economy from immediate negative consequences. “In particular, we are considering reinvesting in gold mining companies to hedge against possible currency devaluation, and in Nordic equities, which have the advantage of less ironic closure requirements with movement restrictions and fewer new cases of coronavirus compared to other regions. Sweden is a good example of the former, while Finland is a good example of the latter, ”he says Luminor analyst.

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