Investor sentiment continues to improve, after diving deeply into negative territory in the early stages of the coronavirus pandemic. CoreData’s Investor Sentiment Index has ticked higher for a third straight week, rising to a more modestly pessimistic -19.2, from a dismal -45.1 in late March, when we first began tracking the impact of COVID-19.
Australia’s relatively strong performance on the public health front, coupled with large fiscal and monetary stimulus, has helped foster an improved public perception of the economic outlook.
Expectations about the short-term future of investment markets have also continued to improve. One in four (25.2 per cent) Australians now expect the market to get better in the next quarter, and the same number expect it to get neither worse nor better (24.9 per cent) during this period. This is a stark comparison to CoreData’s initial pulse check results, which revealed almost three in four (72.2 per cent) expected markets to get worse.
Prime Minister Scott Morrison declared on Tuesday that Australia had reached a turning point in its fight against COVID-19 (note 1). As case numbers continue to improve, the country’s leadership now has the unenviable task of starting to carefully extricate the nation from an unprecedented economic shut down.
The performance of the local share market has seemingly mirrored the improvement in local sentiment. After falling more than 35 per cent from late February, the ASX200 climbed approximately 20 per cent between late March and mid-April, technically entering bull-market territory, and recovering to be nearer to 25 per cent down from historic highs.
Whilst many have welcomed the improved optimism, critics have been quick to note the resemblance of this recovery to the traditionally bearish ‘bull trap’. The thesis here suggests that investors have potentially incorrectly judged March lows to be the bottom of the cycle, with their eager demand for cheap stocks pushing the market higher, only for it to fall again in the near future.
The ‘cheap stocks’ argument relies on the inherent forward-looking nature of equity markets, leading pundits to claim the bleak short-term has been effectively priced in, and the market is recovering based on expected earnings of 2021 and beyond.
With a keen eye on earnings season underway in the US, it is worth noting the ASX200 is currently trading at a forward price-to-earnings ratio more than one standard deviation above its long-term average – suggesting stocks should not yet be considered cheap (note 2).
If the ‘bull trap’ scenario were to play out, the market would begin to fall again, re-testing March lows and potentially breaking support lines to fall further. The ASX200 has declined approximately 5% since April 14, potentially signalling the beginning of the next leg down.
Whether the market has further to fall or not, remains to be seen. What is clear, however, is that investors are becoming increasingly optimistic about the future, despite no obvious improvement in conventional fundamentals.
Three quarters (76.4 per cent) of Australians still believe the country will enter a recession in the next 12 months, and a third (34.2 per cent) say they do not currently feel financially secure. Yet almost one in two (46.0 per cent) have already, or plan to, ‘buy the dip’ and invest money in discounted equities, up from only one in three in previous weeks (33.5 per cent in week one).
One in four (25.0 per cent) expect Australian equities to perform somewhat better in the next quarter, and one in five (21.6 per cent) say they are likely to invest directly in equities in this period. This is despite almost two thirds (64.8 per cent) of Australians expecting gold, a safe haven asset and traditional contrarian to equities, to also perform better.
The harsh reality is that the situation and way forward are still broadly unknown, and the downside risk for equities, property and other investment vehicles remains high. Any investment activity, particularly from retail investors, should be executed without the illusion of security and assured positive returns. Performance updates from the big four banks, beginning with ANZ on April 30, will provide a potential harbinger of what is to come.