Perspective

Markets

Johanna Kyrklund: Are opportunities beginning to emerge?


Johanna Kyrklund

Johanna Kyrklund

Chief Investment Officer and Global Head of Multi-Asset Investment

See all articles

Last week I said valuations are still not cheap enough to warrant taking more risk. After the large falls we’ve seen this week, is this starting to change?

Part of the reason why the market tumble has been so breath-taking is because shares began the coronavirus episode at such expensive levels, particularly in the US.

Such high valuations were precarious and vulnerable to a change in investor sentiment. The result is that since its peak on 19 February, the US S&P500 index has fallen 26.6%, as of the end of the day yesterday (12 March).

So where does that leave valuations now? According to our statistical models, shares are now priced in expectation of a technical recession. This is when an economy shrinks for two consecutive quarters.

Whether a more prolonged recession lies ahead remains to be seen. Our Chief Economist Keith Wade said in an article earlier today that the coronavirus crisis has made him re-assess his outlook for the world economy.

The potential for a longer recession is real, Keith thinks: “monetary and fiscal tools are weak in the face of the virus and until the outbreak is under control the tail risk of a prolonged slump remains high.”

From an investment perspective, I expect the market’s trajectory will go from being a straight line downwards to intermittently heading both up and down for the time being. This is as investors weigh up on one hand the prospect of more lockdowns and a more protracted economic downturn caused by Covid-19, versus the impact of emergency government and central bank  intervention.

At current levels markets have now priced a technical recession with a fairly flat outcome for corporate earnings for the year. If we have a longer term economic slump, we would have to assume earnings decline. This would suggest another 10% downside to stock markets from here. This would probably be accompanied by a great deal of volatility as we have the opposing force of policy intervention which could cause short term bounces.

Considering these risks, I would urge caution. Valuations may be looking far more attractive than a few weeks ago, but this is a market for experienced swimmers only. The sea will remain stormy, but under the surface opportunities are beginning to emerge.

You can find more of our coronavirus insights here.

Important information

This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.

The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.

Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall.

Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.

Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.