Investors have experienced numerous crises, after the technology bubble at the beginning of this millennium, the real estate bubble a little more than ten years ago, we are now facing COVID-19, and these are only the most notable. This time, in contrast to the aforementioned events, stock markets produced a price slump only comparable the Great Depression in 1929, in this speed and magnitude. The measures taken by the states and the ECB have already been documented in detail, so the question remains how the equity markets will fare in these uncertain times?
The recession will turn out to be massive and will trigger a demand shock given the global lockdown, extreme short-term unemployment and historically low consumer confidence. The year 2020 will bring about a massive decline in profits of around 20%, with estimates ranging up to -45%. Default rates will increase and risk premiums will not fall to the old lows, even though 500 bp in the cross over segment is too high. The expected level of profits at the beginning of the year will not be reached until 2023. Despite falling prices, market valuations are still very ambitious.
The central banks and the states act as a counterweight, reacting with increased bond purchase programs and massive support measures by governments. Interest rates will remain low or negative for a longer period of time, so a risk-off strategy inevitably results in loss of capital.
The decisive factor will be how quickly the economic recovery happens. The market is currently pricing in a V-shaped recovery, should the recovery take longer, markets will correct again. For equity investors, this means staying cautiously seems to be an adequate strategy, markets will stay volatile, and larger setbacks should be used for partial purchases.
Author:
Horst Simbürger, MSc, CEFA
Managing Director
CONVERTINVEST Financial Services GmbH
4 May 2020
 |  |
Note
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.