Closing in on the bottom

26 March 2020

4 minute read

In the past few days, a series of new developments seem to indicate that the market may have found a bottom, at least temporarily. We believe that a floor may be found based on a combination of i) attractive-enough valuations; and ii) improved clarity on the possible timeline for an end to the coronavirus crisis, likely in the form of improving Italian infection data.

On valuations, we highlighted 2,200 on the S&P 500 as a level that would be commensurate with previous bear markets and recessionary pullbacks. On 24 March, the index rebounded twice on that level, as news of a $2tn US fiscal Covid-19 response package emerged, which corresponds to a 35% compression in trailing valuations. While this is by no means an absolute floor, it is encouraging to see buyers stepping in at the “right” valuations.

Italy’s worst-case Covid-19 scenario

On the Covid-19 pandemic, we think that part of the extreme volatility seen in markets was linked to the exceptional difficulty, of not impossibility, of forecasting what comes next. In this context, Italy was seen as the first good template for what may lie ahead in other parts of the world. Indeed, unlike China where only a small part of the country was in lockdown or South Korea’s far superior testing capabilities, Italy, unfortunately, offers a glimpse of a worst-case scenario could look like.

After weeks of almost total economic and social shutdown, Italy has final seen daily deaths linked to the coronavirus start to decline. From a peak of 793 deaths reported on 21 March, the average over the last three days has been around 665, showing some tentative stabilisation. Again, a relapse is possible and we could see cases jump again, but we view the recent trend positively.

Extrapolating Italy’s experience to the rest of the developed world would suggest that the peak of the health crisis could occur in late April. Of course, this assumes that other countries implement similar measures to Italy’s lockdown.

Not out of the woods yet

We may not be out of the woods just yet. Indeed, a lot of questions remain. On the Covid-19 outbreak, the risks around a second wave are not clear. While infection rates would likely be less severe as more people have developed immunity, a second round of lockdowns would be as damaging to global economies.

On the economic front, we are just starting to get an idea of those damages. Purchasing managers’ indices registered their biggest month-on-month drop on record in March and jobless claims are soaring. Default rates are also likely to increase. Everybody expects a sharp, and unprecedented, slowdown in activity. However, the timing, the pace and the magnitude of the rebound remains highly uncertain at this stage.

Focusing on quality is paramount

We expect continued volatility in the medium term and can’t rule out further sell-offs. As such, from an investment perspective, we believe that long-term investors should avoid a passive approach. While value and “beaten down” sectors or companies will likely outperform in a recovery scenario, we remain convinced that focusing on quality and appropriate diversification is paramount.

For those looking for distressed situations, we believe that the most attractive opportunities will arise in private markets where managers can help influence companies’ fate (as opposed to just relying on government support in listed market).

Related articles

Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

This document has been issued by the Investments division at Barclays Private Banking division and is not a product of the Barclays Research department. Any views expressed may differ from those of Barclays Research. All opinions and estimates included in this document constitute our judgment as of the date of the document and may be subject to change without notice. No representation is made as to the accuracy of the assumptions made within, or completeness of, any modeling, scenario analysis or back-testing.

Barclays is not responsible for information stated to be obtained or derived from third party sources or statistical services, and we do not guarantee the information’s accuracy which may be incomplete or condensed.

This document has been prepared for information purposes only and does not constitute a prospectus, an offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instrument, which may be discussed in it.

Any offer or entry into any transaction requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding transaction documents. Any past or simulated past performance including back-testing, modeling or scenario analysis contained herein does not predict and is no indication as to future performance. The value of any investment may also fluctuate as a result of market changes.

Neither Barclays, its affiliates nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation..

This document and the information contained herein may only be distributed and published in jurisdictions in which such distribution and publication is permitted.  You may not distribute this document, in whole or part, without our prior, express written permission. Law or regulation in certain countries may restrict the manner of distribution of this document and persons who come into possession of this document are required to inform themselves of and observe such restrictions.

The contents herein do not constitute investment, legal, tax, accounting or other advice. You should consider your own financial situation, objectives and needs, and conduct your own independent investigation and assessment of the contents of this document, including obtaining investment, legal, tax, accounting and such other advice as you consider necessary or appropriate, before making any investment or other decision.