Research from T.Rowe Price this week sheds some light on emergency central bank stimulus that has been “without precedent” in the modern era.

Analysis by portfolio manager Scott Berg, from the investment firm’s Global Equity Strategy team, illustrates the scale of the response via a useful comparison to 2008’s financial crisis — the last time markets had a complete meltdown.

Across the globe, monetary support from central banks is “expected to more than double the previous peak in 2010 after the financial crisis”, Berg said.

Source: T.Rowe Price

In fact, the coordinated rounds of central bank support in March — led by the US Federal Reserve — were so large and decisive that it took some time for investors to appreciate exactly what had happened, Berg said.

With the benefit of hindsight, March may feel like a long time ago to stock investors given the impressive post-stimulus rally in global share markets.

But at the time, one member of the Fed described the chaos as if it was “the (2008) financial crisis and 9/11, happening at the same time”.

In terms of the GFC as a comparator, one interesting observation Berg made is that combined with the historic levels of government support, the global policy response has received a warmer reception.

“During the GFC, stimulus was often portrayed by the financial media as governments bailing out the big global banks,” Berg said.

“This time around, I think governments have done a better job of saying ‘We are doing everything we can to help those who are suffering because of the coronavirus’.”

Berg added that the Fed’s early pledge to a ‘whatever it takes’ solution achieved its central and most critical goal — maintaining liquidity in global markets.

And while global economic growth has come to a screeching halt, that extra liquidity goes someway to explaining the stark divergence between stock prices and the economy.

Liquidity “was an important signal to us that this recession was unlikely to become a financial crisis”, Berg said.

Particularly given that companies still had access to debt funding markets “even in some of the sectors that had been negatively impacted the most by the coronavirus”.

 

Looking ahead

That market ‘backstop’ helped spark a historic rally in stocks, with the S&P500 coming off its best August result in over 30 years.

But a sharp selloff this week has served as a reminder that volatility still lingers, and the investment road ahead may echo the complex task involved to restore economic growth to pre-crisis levels.

For his part, Berg takes the view that after starting 2020 on a solid footing, the global economy will lose around 18 months of growth due to the crisis.

So with US stocks already back to their pre-crisis levels, it’s the economy which has some catching up to do. But based on the 18-month outlook, he’s looking for the economy to return to pre-crisis levels of activity by the September quarter of next year.

He tied that back to the stocks outlook by citing a consensus among some equity analysts — that stocks will rise by around five to seven per cent from now until then. Effectively, that will bring markets and the economy back to a pre-crisis level.

“From a top-down macro perspective, that doesn’t strike me as a totally unreasonable outcome for global equity valuations”, Berg said.

However “tactically it makes sense to be more prudent than two or three months ago”.

Along with the ongoing health crisis, unemployment rates remain high while geo-political tension between the US and China have reared their head — not to mention uncertainty tied to this November’s US election.

In terms of portfolio construction, Berg said T.Rowe Price is still overweight to sectors that have benefited the most from post-COVID tailwinds.

But the fund’s second largest overweight position may provide some solace to battle-weary holders of Australian bank stocks.

While fintech high-flyers (see: BNPL stocks) have surged in recent months, Aussie banks are still trading around 30-40 per cent lower than their pre-crisis highs.

However, Berg noted that financials often tend to lag the pack at the start of a new equity cycle, before picking up steam later on.

Broadly speaking though, “this is not the time to become outright defensive in the portfolio, as we believe we are in the early stages of a new equity cycle” he said.