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Valuations becoming more realistic as longer recession becomes possibility

16 March 2020

As global markets continue to fall amid the ongoing Coronavirus outbreak, valuations are starting to look more appealing, according to Schroders chief investment officer Johanna Kyrklund.

The Coronavirus continued to wreak havoc on stock markets and  industries around the world, including aviation, and prompted widespread fear that businesses would struggle to recover from the downturn.

Kyrklund said part of the reason why drops in the market have been so sharp is because shares were previously set at expensive levels, particularly in the US.

“Such high valuations were precarious and vulnerable to a change in investor sentiment,” Kyrklund said. “According to our statistical models, shares are now priced in expectation of a technical recession. Whether a more prolonged recession lies ahead remains to be seen.”

Schroders chief economist Keith Wade (pictured) believes there is a very real possibility of a longer recession.

He commented: “Monetary and fiscal tools are weak in the face of the virus and until the outbreak is under control the tail risk of a prolonged slump remains high.”

From an investment perspective, Kyrklund expects the market trajectory will go from being a straight downward line to intermittently both heading up and down as investors weigh up the prospect of more lockdowns and a protracted economic downturn caused by Coronavirus versus the impact of emergency government and central bank intervention.

She added: “At current levels markets have now priced a technical recession with a fairly flat outcome for corporate earnings for the year. If we have a longer term economic slump, we would have to assume earnings decline. This would suggest another 10% downside to stock markets from here. This would probably be accompanied by a great deal of volatility as we have the opposing force of policy intervention which could cause short term bounces.

“Considering these risks, I would urge caution. Valuations may be looking far more attractive than a few weeks ago, but this is a market for experienced swimmers only. The sea will remain stormy, but under the surface opportunities are beginning to emerge.”

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