Home Kuo’s Smart Take Smart Thought Of The Week: Risk

Smart Thought Of The Week: Risk

The rebound of global stock market has caught some investors by surprise.

Aren’t we in the worst pandemic that many of us have experienced in our lifetimes? Isn’t just about every continent on our planet being affected by the deadly pathogen that knows no boundaries? Isn’t just about every economy in the world experiencing a slowdown of mammoth proportions?

Those are all true. This is the worst pandemic that most of us have ever experienced. Antarctica is the only continent with no known cases of the coronavirus disease. And according to the IMF, the global economy is expected to shrink 3% this year. It would mark the steepest downturn since the Great Depression.

So, why are stock markets behaving as though we are on the road to recovery? The US market is up around 25% this month. The London market has improved 15%, whilst Hong Kong’s Hang Seng has put on 10%. Both Kuala Lumpur and Singapore markets have gained 10% and 14%, respectively.

So, what gives? Are investors completely oblivious to how just how long the pandemic could be with us for? Or is there some other reason why investors are pushing the market higher?

It is probably the latter. I doubt if anyone is in any doubt as to how long Covid-19 will be around. Some experts are even talking about the possibility of a second wave or more. This is a clever virus that seems to be able to exploit any weakness in our defences.

But investors are probably now better able to work out the parts of the economy that are working and those parts that are left wanting. Consumer staples, food producers, personal care, healthcare, logistics, technology, and pharmaceuticals are some sectors that appear to be relatively unaffected.

Another consideration is valuation.

Admittedly, not all companies can be properly valued at the moment. There are just too much that we still do not know about Covid-19.

But it is better to be roughly right than totally wrong. So, we must use whatever tools at our disposal to make an educated guess. Some are looking beyond the pandemic to when some kind of normalcy can return. That will require a lot of patience and serious long-term thinking.

Investing in shares is never without risk. But it can deliver a premium over risk-free investments – the equity risk premium over the long term. That has never been truer than now.

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Disclosure: David Kuo does not own any of the shares mentioned.

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