As markets reel from pandemic, where’s the bottom?
How does one begin to invest in a market hamstrung by an invisible germ that has hobbled great economies from East to West, China to the Americas?
But invest must Nigerian fund managers and Pension Funds undertake, as well as individuals who work today and hope to save/invest enough in their nest eggs for retirement tomorrow.
If that is the case and if there is no escaping the carnage that is all around markets today, what must investors look out for?
One of the great advantage, market professionals often have is the ability to hearken back to similar periods of meltdown in the past and use their experiences from such periods to navigate current times.
So while market history may not often repeat itself, it often rhymes.
Looking back at the last major global recession (2008/2009), what were some of the signals of a bottom in the selloff in risk assets?
A big one was the movement in commodities and miners.
Back then hard commodities like copper and steel were major proxies for global growth and were at multi year highs just before the recession hit, signalling a top.
High flyers like Freeport McMorran (FCX) a U.S based operator of large, long-lived, geographically diverse assets with significant proven reserves of copper, gold and molybdenum, U.S Steel (X), and other such names, were selling off once the recession hit and were often the first to bottom out as investors began to feel that the Chinese demand that drove the stocks was roaring back.
Today investors may want to look at these and other proxies for global growth to see if they have bottomed before pulling the trigger on risk assets.
Another tell-tale sign for a turnaround in the markets is often the direction of oil prices.
While a drop in oil prices is often seen as a tailwind for global consumption (or tax cut for the U.S, as President Trump has recently touted), the truth is that too much of a slump in oil prices often causes more harm than good.
First of all take the finances of OPEC countries and other oil producers, which usually takes a beating during a time of falling oil prices.
Last month, the International Energy Agency or (IEA) and OPEC warned in a rare joint statement that developing countries’ oil and gas income could fall to their lowest levels in more than two decades if current energy market conditions persist.
IEA Executive Director Fatih Birol and OPEC Secretary General Mohammed Barkindo expressed “deep concerns,” about the coronavirus pandemic, warning it could have “potentially far-reaching economic and social consequences.”
Birol and Barkindo said they expect developing countries to see their oil and gas income fall by 50 percent to 85 percent in 2020.
This could mean losses of up to $500 million a day according to estimates by Reuters.
That spending by OPEC members and other oil producers is often a major juice for the global economy and a source of demand for everything from European airplanes and American weapons to Latin American beef and Thai rice.
There is also the small issue of U.S shale producers, getting blown out with thousands of jobs and billions of dollars in debt at stake.
So a turn in oil prices, often signals a bottom is in for risk assets. It was true during the last 2 downturns in oil in 2015 and 2008/2009.
How do investors know the bottom is truly in for oil? Often price action is positive in the face of what would otherwise be bad news, such as a major monthly inventory build-up or weak GDP numbers from a major consumer such as the U.S or China.
Lastly the bottom is usually in when governments of the major economies of the world panic and bring out the big guns.
At last count Governments and central banks around the world have unleashed unprecedented fiscal and monetary stimulus and other support for economies hit hard by the coronavirus pandemic.
The G20 said on March 26 it would inject more than $5 trillion into the global economy to limit job and income losses and “do whatever it takes” to tackle the pandemic.
Once Governments begin to panic, then we are usually at the phase of the crises, where if it’s not quite the end, it is the beginning of the end and a signal that the bottom is not much lower than the current levels.
There is also the little matter that all that stimulus, will help to pump up asset prices once the uncertainty from the crises passes.
Investors should look out for these signs. Some are already happening, such as the massive stimulus being readied by global central banks and fiscal authorities. Nigerian investors should also know that there is very little the Federal Government can do to turn this around locally.
The current economic shocks began as a global black swan event triggered by the coronavirus, and it will end from the effects of the wall of liquidity primed to inflate asset prices, once the virus fades away.