In our view, because the equity market is mostly forward looking, as long as this global health crisis is not seen as a permanent shock to the world’s potential, equity prices ought to be well supported. We note that a sharp down leg activity is already widely expected: the down leg is the one feature that all recoveries have in common – V, U, W and L-shaped recoveries. This is also consistent with the collapse in oil prices – reflecting rock-bottom current demand. This widely expected down leg in activity means that equities really should not have material downside risks before June/July, when data for May and June render a verdict on what shape the recovery will actually take.
At the same time, considering the high and rising levels of public debt, central banks will almost certainly have to keep interest rates low for a long time, providing a major tailwind for equity markets for the foreseeable future. Further, with US Treasury yields so low, just above 0.60%, the risks of capital losses are so high on the US Treasuries that they are not nearly as good a safe haven as they were a couple of months ago.
In our view, the ultimate safe haven assets in the world are big US tech stocks: the companies are cash-rich, operate globally and dominate their respective fields. There will be big winners and big losers from this shock, but we believe US tech, which is well represented in the SPX, will be a big secular and cyclical winner.
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