Markets keep grinding upwards while the global economic outlook remains bleak. This is because the two are unrelated, said Lombard Odier’s Asia chief investment officer, Jean-Louis Nakamura, adding the rally is not yet over.
After a shaky early 2020, markets at large have reversed to grind upwards and haven’t stopped since. Though this hasn’t been an equal rebound with numerous markets still in the red, the combination of the two events has nonetheless created what Lombard Odier’s Asia CIO Jean-Louis Nakamura called «one of the most brutal meltdowns ever followed by the most spectacular market recovery» in history.
While some economies are demonstrating resilience, nearly none have recovered to pre-crisis stages and many projections remain pessimistic. So why has this «spectacular» rebound occurred and how long will it last? Nakamura believes there are two main factors.
«Economic Fundamentals Do Not Really Matter»
The first factor is how extraordinary the reopening of economies has been, which has resulted in broad shock that led to a sharp rebound. But many onlookers have noted that this still does not explain why the rally continues to persist given the gloomy outlook.
That, according to Nakamura, is due to the second and more controversial factor: valuations and economics are not necessarily linked.
«It’s not new, and I’ve been explaining for the last eight or 10 years. And I apologize to my colleagues for repeating the same again today,» he said at Lombard Odier’s virtual conference yesterday. «[The fact is that] it’s been a long time now that economic fundamentals do not really matter to explain market valuations.»
So What Matters?
Nakamura underlined that the top driver of market valuations is excess liquidity and recent events have led to even higher levels.
«[W]ith the amount of excess liquidity provided by central banks – in early March, especially – and with the additional stimulus provided by fiscal policy, which is a true breakthrough compared to what we’ve had over the last 10 years, it’s no surprise to see markets recover to where they have recovered so far,» he explained.
Nakamura added that the bank expects continued but slower positive growth which will ensure supportive economic policy. And on markets, he expects the rally to persist «for a quite significant period of time».
7 Convictions
For investors in the region, Lombard Odier is currently focused on seven main convictions. On the economy, it expects the recovery to continue and policy to remain supportive.
On the U.S., the bank expects continued geopolitical tensions with China but limited impact to markets; policy transformation under a potential victory by the Democratic Party; and continued dollar depreciation at the same rate. It also expects U.S. assets to underperform Asia and Europe assets in the second half.
The bank’s seventh and final conviction is in the new age sectors that will benefit in the post-crisis environment. This includes business models proven to be resilient during major shocks like the pandemic and a wide range sub-sectors in technology including fintech, cybersecurity, logistics, urban infrastructure, transportation and logistics.
