Why are we suddenly seeing a period of market volatility and price falls when there is light at the end of the tunnel due to the vaccines currently being rolled out?
“First of all, we should note that a setback after an extended upward run is not unusual, and recent months have seen very significant increases in equity market prices.
“That being said, there are several reasons for the current uncertainty:
“Some investors are likely disappointed that the corona vaccine rollout is not progressing faster. Meanwhile, there is widening acceptance that Joe Biden will not achieve sufficient political support for his full economic stimulus package totalling USD 1900bn – it will be smaller than initially assumed, and so the economic impact will also be less significant.
“In addition, the formation of potential bubbles in parts of the equity market and increasing speculation in certain equities by groups of private investors are causing concern. Focus in the past week has been particularly concentrated on the ailing retail chain GameStop, which sells computer games and consumer electronics. Hordes of private investors have actively traded the stock higher and inflicted billion-dollar losses on hedge funds that had shorted the company. That can have repercussions for the markets, as the hedge funds may be forced to liquidate other positions to cover their losses and so trigger a negative chain reaction,” says Danske Bank’s investment strategist, Lars Skovgaard Andersen.
Should this market turmoil be a cause of concern for investors?
“No, not for now. At Danske Bank, our base scenario remains that we will see a large, positive economic effect from the vaccines in the course of the spring and summer. First, because there is a good deal of postponed consumption that we expect will materialise and, second, because the major economic relief packages and the extremely accommodative monetary policies of the central banks provide a good foundation for an economic upswing in 2021. We expect this will support equity markets and are therefore maintaining our modest overweight in equities.
“The ongoing reporting season also gives no grounds for worry. Looking at US corporate earnings, which are the key guide for equity markets, just over one third of S&P500 companies have so far presented their reports and the vast majority have exceeded analyst expectations.
“Naturally, investors, not analysts, decide whether a price should rise or fall – but equity markets have certainly not fallen in the past week because of catastrophic earnings reports.”
You mentioned that fears of bubble formation are stoking uncertainty. Are there bubbles, in your view?
“Yes, there are some segments in the equity markets where prices have, in our opinion, risen too far relative to what expected earnings in these companies might justify. This includes certain electric vehicle manufacturers, e-commerce companies and green companies involved in hydrogen energy, for example. While we see a number of strong, long-term trends in these areas, investors have been too fast to price in the potential upside.
“Looking at equity markets more broadly, we are less concerned, even if equity valuations are doubtless on the expensive side right now, historically speaking. Part of the story is also that the very low or negative interest rates on many bonds provide limited alternatives to equities, and should we see further price falls in the time ahead – which of course cannot be ruled out – we would view that as a buying opportunity.”