Economy

Will there be a second blow down on the stock market?

On March 16, due to all the turmoil about the coronavirus, the AEX index briefly touched 389.6 points, while we had started the year at over 604 points.

However, the main stock market indicator is now almost 35 percent higher than in mid-March. While the European Commission expects the EU economy to shrink by 7.5 percent this year, a ‘recession of historic magnitude’.

‘A lot of skepticism’

“I see a lot of skepticism, especially among large investors,” says Corné van Zeijl of Actiam. He quotes the American stock market guru Warren Buffett, who is mainly selling with his investment fund Berkshire Hathaway, while having over $ 130 billion in cash.

Private investors, on the other hand, are buying, says Van Zeijl. He finds that contradiction ‘quite a thing’. Institutional investors have traditionally had a slightly better track record, he adds.

Stock market looks ahead

The real economy has yet to take a big hit, but stock markets are by definition looking ahead, says Bond Capital Partners’ Stan Westerterp, about the poor economic outlook.

Governments and central banks have pumped a lot of money into the economy, he says. In addition, the low interest rate also ensures that investors who want returns are driven to the stock markets. After all, you don’t get far with savings or bonds.

Correction

However, the economy will no longer recover so quickly to the old level, Westerterp thinks. “After all, we do not immediately go to the cinema or discotheque en masse.” It does not seem illogical to him that a correction will be made again, partly because the stock market has already recovered considerably.

“Nobody has a glass ball,” says Westerterp, but he will not see those 389 points for the AEX on the race boards any time soon. Such a level would mean a drop from the current level of 25 percent.

However, a correction of 10 to 15 percent could very well, Westerterp thinks. On average, you see such a reaction once a year, but it can be done again, he says.

W shape or V shape

In a recession, the bottom of the stock exchange often has a W shape, says Ralph Wessels, head of investment strategy at ABN Amro. This means that the prices spring up and then drop back. That was the case in 2008, after the internet bubble burst in 2000, in 1987, and in 1973, he says.

At the same time you see a V-shape in the stock market recovery during an epidemic. Now, however, there is a pandemic, with a global recession, Wessels said. Affected regions cannot therefore move forward to other parts of the world.

He assumes a profit decline of companies from the MSCI World Index of about 30 percent. ABN Amro therefore advises to be more cautious with shares and to hold more in cash.

Long term

Wessels especially fears effects in the somewhat longer term of the (partial) closure of the economy. As a result, the number of bankruptcies and the number of unemployed will increase, which will reduce consumer confidence, which will slow them down with spending.

Lockdowns also depress producers’ confidence, which means they invest less and, for example, hire fewer people. The longer the lockdowns last, the more damaging it is.

Recovery from second quarter

In the somewhat longer term, however, Wessels is optimistic. The low will hit the economy in the second quarter, but recovery will start from the third quarter, he thinks.

From the second quarter of next year, he sees a strong recovery in the global economy. The stock market will anticipate this, but much will also depend on whether there will be a vaccine against the coronavirus or a second wave of infection, he concludes.

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