SEB analyst: Markets buoyancy likely a false dawn ({{contentCtrl.commentsTotal}})

SEB economist Mihkel Nestor.
SEB economist Mihkel Nestor. Source: ERR

A recent stock market rally is a false dawn with regard to the crisis sparked by the coronavirus pandemic, a spokesperson for major bank SEB told Baltic News Service.

"If one is to believe in the ability of equity markets to predict the future, there is light at the end of the tunnel," said Mihkel Nestor, economist at the Scandinavian-owned bank.

Nestor noted that earlier panic has been replaced y a wave of optimism which has seen the U.S. S&P 500 index rise 23 percent compared with its absolute low for March, and Europe's STOXX600 climb 17 percent.

Nestor said that there could be two reasons for such optimism, which may be premature, first a belief that the virus will be overcome soon and second a belief that no matter how bad the situation, governments will be able to "spend themselves out" with the help of central banks.

"The past few days have been sending positive signals indeed, with the increase in the numbers of new infection cases declining in Europe and the U.S. alike. In Italy, the epicenter of the disease, the number of new cases per day has declined from 6,000 to 3,000-4,000, and the number of deaths from close to 1,000, to 500, for instance."

"The number of new cases is also declining in the U.S., albeit more moderately. If we add to this the mystical amounts of money that governments have promised to spend to revive economies hit by the crisis, market participants have come to the conclusion that it's again time to start buying stocks," Nestor went on.

Nestor said that, however, the unambiguous message of virologists is that the coronavirus is here to stay. This means that infection rates could start growing again at any point, and restrictions be reimposed. 

"Already now we are seeing a vision of the future in Asia, where the virus is making a  comeback," the analyst said.

"The danger that of the virus getting reintroduced to a country which had got tenrid of the illness is so great that it's still very difficult at present to see a time when we can travel freely again. For instance, Sebastian Kurz, the chancellor of Austria, who is easing other restrictions, has indicated that holidays abroad will be ruled out until the invention of a vaccine. That, according to present knowledge, could happen in years rather than in months."

Different from 2008-2010 crisis

Increasing talk of easing restrictions in European countries like Denmark and the Czech Republic, as well as Austria, is still ongoing, he noted, adding discussions about a virus exit strategy in Estonia to that list. However, this is not wholly appropriate, in Nestor's view.

"Despite several positive pieces of news, today's optimism on the financial markets seems premature. According to many analysts, this is a bear market rally, so to speak, where a major decline is followed by a temporary rise, only to allow the stock indexes fall even deeper. Read into the financial markets what you will, a rapid recovery of the real economy continues to look more than unlikely."

Nestor put this into sharp relief even against the last major downturn of 2008 onwards, where at least business did not grind to a halt due to restrictions. Some damage might be indefinite, he added.

"As business operators note, the financial crisis of 2008-2009 was completely tolerable compared with a situation where you have to make do with zero turnover. Even if governments' relief measures succeed in preventing most of the otherwise inevitable bankruptcies, demand will not be restored overnight. In addition to the slowly receding fear of the virus, many people have lost their income and savings. Thus the restoration of total pre-crisis consumption will take years, not months. The repair of broken-down supply chains will take its time, and the pre-crisis situation in that field will hardly be fully restored, ever" he said.

Businesses have had to increase their loan burden to survive during the crisis, which will further undermine their capability to make new investments in the future, Nestor said.

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Editor: Andrew Whyte

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