Investors should brace for another sharemarket sell-off, warn analysts
Investors are being warned to expect another major sell-off after the ASX rallied 20 per cent in spite of an increasingly grim economic outlook.
As businesses shed roughly one million jobs and whole industries came to a standstill, investors took comfort in the massive stimulus announced by global policymakers and rushed to buy discounted stocks.
The Australian sharemarket subsequently recorded its largest monthly gain since March 1988 in April, with the broader All Ordinaries Index rising 9.5 per cent over the month.
And, as of May 20, the benchmark S&P/ASX200 index has rallied 22.6 per cent since the recent low of March 23 – the day after the Australian government announced its second stimulus package.
Although the impressive rally came after a massive peak-to-trough fall of 36.5 per cent, analysts say investors should tread carefully, as it remains to be seen whether the worst of the falls are now behind us.
Part of the reason why sharemarkets are bouncing amid the economic doom and gloom is because they are forward looking, with the massive sell-off in March driven by investors offloading risky assets before the crisis really bit.
This helps explain why the Australian sharemarket had its best month in more than 30 years at a time when Treasury and Reserve Bank officials were warning of the greatest economic shock since the Great Depression: Sharemarkets had already “priced in” the risk, and governments and central banks had come to the rescue.
But another reason why the ASX is climbing is because governments are starting to ease restrictions, so investors believe the economy is on the road to recovery.
The trouble is, past experience suggests another major sell-off is just around the corner.
Which is why Glenn Leese, director of growth at TradingView, believes investors are being overly optimistic.
“Of course we are excited that our local pub may be able to open again soon, but with a limit of potentially 10 customers, how can we expect that establishment to even turn a profit?” Mr Leese told The New Daily.
“The talk is positive, the reality is not.
Investors need to be realistic; the economy has suffered a big blow and it’s not something we can just walk away from tomorrow.”
Mr Leese, who has more than 15 years’ experience trading in equities, foreign exchange, commodities and cryptocurrencies, said sharemarkets often experienced a short rally after massive falls, before continuing down even further.
“Investors should be aware that crashes and corrections normally occur in a series of three waves. We have seen wave one and we are now watching wave two. Wave three has not occurred and this needs to be taken into account,” Mr Leese said.
“From a technical viewpoint, the ASX could rally as high as 6200 to 6300 points before wave three commences. Wave three could also commence right now.”
(The S&P/ASX 200 closed trading on May 20 at 5573.0 points, down from its all-time high of 7162.50 on February 20.)
Mr Leese added: “With this level of risk, it’s not a market I’m willing to invest heavily in just yet.”
Looking past the pain
Investors are looking past the barrage of horrifying economic data for two key reasons, according to Rob Holder, asset allocation and portfolio analyst with Crestone Wealth.
Firstly, they have already priced in the bad news for the second quarter (April 1 to June 30). Or at least a good chunk of it.
And secondly, they “took heart” in the massive stimulus announced by governments and central banks.
The federal government pledged roughly $200 billion of spending to “cushion the blow” of the pandemic.
The Reserve Bank of Australia started quantitative easing for the first time in history.
And, a little further afield, the US Federal Reserve promised to buy government bonds in unlimited amounts.
Such unprecedented support made investors feel as though policymakers would do whatever it takes to protect financial markets.
Where to now?
Mr Holder told The New Daily markets were “very much focused on” whether governments can lift restrictions without sparking a second wave of restrictions, and what happens to the economy in the second half of this year.
Mr Holder said investors were pricing in “somewhere between a V- and U-shaped recovery”.
In other words, investors are banking on a relatively hiccup-free return to the pre-crisis economy.
And so, if there’s a second wave of infections, governments are otherwise forced to reintroduce restrictions, or data over the next two quarters shows the shape of the economic recovery is not somewhere between a V and a U, then another major sell-off will be on the cards.
“Markets are probably pricing a good outcome,” Mr Holder said.
“[But] you’d have to say risks are skewed to the downside.”