Markets draw comfort from ‘maximum’ central bank stimulus

Bargain-hunting investors are growing increasingly confident that the past month’s chaos in markets may have thrown up buying opportunities of a lifetime.

Reassured by the US Federal Reserve’s pledge on Monday to buy government bonds in unlimited amounts, along with similar moves from central bankers elsewhere, markets have regained a semblance of calm. A frantic period mid-month saw the S&P 500 drop 9.5 per cent, rise 9.3 per cent and then lose 12 per cent in three consecutive days, as investors struggled to price in the economic damage from coronavirus.

But gains in recent days have put the index on track for its best week in at least a decade, and have prompted some cheery investors to pile in at what they see as attractive prices.

“We’re not talking about the GFC [global financial crisis in 2008]; the banking system is very robust,” said Ilan Chaitowitz, part of a team of equity fund managers running $3bn in assets at Nomura Asset Management. “Some of the most amazing companies in the world are being punished along with everything else.”

Mr Chaitowitz and his colleagues had built up the levels of cash in their funds ahead of the market slump and have used it to buy stocks in recent weeks. One example is US boiler company AO Smith, he said, which recently dropped to a 10 per cent discount to its long-term price/earnings ratio.

We need to wonder whether there will be earnings at all this year

He added that the extra return offered by equities over bonds — as measured by the S&P 500’s earnings yield minus the 10-year Treasury yield — is now at its highest level since the eurozone debt crisis of 2012.

“It could be that, in one-to-two months’ time, we have a situation where infection rates are peaking and we’re at maximum fiscal and monetary stimulus,” he said, alluding to plans in US Congress for a $2.2tn package. “Plus we’ve just had a massive giveaway in the collapse of the oil price.”

Hedge funds too see a chance to buy cheaply for the long term. Sir Christopher Hohn’s London-based TCI and quantitative investing giant DE Shaw are among those looking to raise further money from investors, said people familiar with their plans.

Calling the bottom of the market, or trying to buy dips, are notoriously difficult games. President Donald Trump tweeted late last month that the US stock market was “starting to look very good to me”, although the S&P 500 has subsequently fallen about 16 per cent.

However, extraordinary stimulus efforts around the world have added to confidence among some investors that asset prices are reflecting too much gloom from Covid-19. The Fed’s unprecedented package, for instance, will encompass purchases of corporate debt, including new issues — a measure it did not adopt during the 2008 financial crisis. The European Central Bank has thrown off most constraints on its programme to buy an extra €750bn in bonds this year.

Many investors still worry that activity in sectors of the global economy such as travel, leisure and high-street retail is grinding to a halt as more and more countries enforce lockdowns on their populations. Those are problems that fiscal and monetary stimuli cannot fully remedy. The danger for investors in equity or riskier credits is that companies that look tremendous value now could cease to exist in their current form.

Nevertheless, a growing number are turning more positive. Billionaire investor Bill Ackman, who only last week said that “hell is coming”, told investors in a letter this week he had been encouraged by the Trump administration’s “all-in approach”. Mr Ackman has started “redeploying our capital in companies we love at bargain prices”.

And Matthew Beddall, former chief investment officer at hedge fund giant Winton Group and now chief executive of investment firm Havelock London, has started to spend some of his fund’s cash — now about 20 per cent of its assets — on stocks.

“At times like these I believe that the panic of others creates the seed of opportunity,” he said. “We have seen a number of companies that look the cheapest they have even been for 30 years on certain measures.”

Others spy an opportunity, but remain wary. Matthias Scheiber, Global Head of Multi-Asset Investments at Wells Fargo Asset Management, said he is defensively positioned, as the market has yet to take full account of likely falls in corporate profits.

Loic Fery, chief executive of credit specialist Chenavari Investment Managers, is looking to buy into structured credit but remains cautious.

“There have been big numbers announced [from central banks and governments],” he said. “Ultimately what matters is [that] these will effectively reach corporates’ bank accounts.”

While stock prices may look attractive under normal circumstances, he said, these are not normal circumstances. “We need to wonder whether there will be earnings at all this year.”

Additional reporting by Robin Wigglesworth and Philip Georgiadis